The DOL has issued the first of several FAQs addressing the DOL’s new fiduciary rule, which was finalized in April 2016 (the “Rule”). The Rule, which will generally become effective on April 10, 2017, prohibits parties that provide fiduciary investment advice to plan sponsors, plan participants, and IRA owners from receiving payments that create conflicts of interest, unless the parties comply with a prohibited transaction exemption (“PTE”). The FAQs generally address how the Rule will be implemented and clarify a number of issues related to the new “best interest contract” and “principal transactions” PTEs. View the FAQs. View the DOL’s announcement of the FAQs.
Over the past several months, high profile class action lawsuits have been filed against plan sponsors and fiduciaries of very large 401(k) plans alleging breaches of fiduciary duty related to excessive plan administrative fees and underperforming investment options. A new class action lawsuit filed in the U.S. District Court of Minnesota raises concerns that plan sponsors and fiduciaries of relatively small 401(k) plans may also become targets of such suits. Similar to the class actions filed against fiduciaries of large 401(k) plans, plaintiffs in the case of Severson v. LaMettry’s Collision, Inc. allege their employer, its president, and its CFO breached their fiduciary duties by causing the employer’s 401(k) plan to pay excessive administrative fees, selecting imprudent classes of investments, and selecting investment options that were unnecessarily expensive. Unlike the other class actions, the LaMettry 401(k) plan is relatively small, having just over 100 participants and approximately $9.2 million in… Continue Reading
Fifth Circuit Addresses ERISA Fiduciary Duty of Appointing Fiduciary to Monitor an Appointed Fiduciary
The U.S. Court of Appeals for the Fifth Circuit, which includes Texas, upheld a district court judgment that the former owner of a privately-held company engaged in a prohibited transaction and breached his fiduciary duties of loyalty and prudence when selling shares of company stock to his former company’s leveraged employee stock ownership plan (“ESOP”) at prices in excess of the stock’s fair market value. Specifically, the court found that the owner influenced the outcome of the appraiser’s valuation of the stock to achieve a higher stock price, which resulted in the ESOP overpaying for the stock. The Fifth Circuit disagreed with the district court’s holding that the owner, who was also a trustee of the ESOP, breached his fiduciary duty to monitor the other two plan trustees whom he had appointed and whom he knew had breached their duties of loyalty and care. Perez v. Bruister, No. 14-60811 (5th… Continue Reading
The DOL has issued a final regulation defining who is a “fiduciary” of an employee benefit plan under ERISA (including an individual retirement account (“IRA”)) as a result of giving investment advice to a plan or its participants or beneficiaries. The DOL also issued a number of related prohibited transaction exemptions (including the “Best Interest Contract Exemption” and the “Principal Transactions Exemption”) and amendments to certain current prohibited transaction exemptions. The final rule broadly treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of an employee benefit plan or IRA as fiduciaries in a wide array of advice relationships. Although the final rule maintains the same essential framework as the proposed rule, it includes a number of changes and clarifications which the White House has indicated are efforts by the DOL to “[streamline] the rule and exemptions to reduce the compliance… Continue Reading
An employer permitted participants in its 401(k) plan to transfer their account balances into the employer’s cash balance plan, where each participant’s account balance was based on hypothetical investments chosen by the participant. The employer was not required to and did not invest the trust assets in the investments chosen by the participants. The IRS determined that the transfers violated the anti-cutback provision in Code Section 411(d)(6) because the transfer eliminated participants’ actual separate accounts. Participants sued the employer for violating the parallel anti-cutback provision in ERISA Section 204(g)(1) and sought an accounting of the profits that the employer made on the spread between the plan’s actual investments and the hypothetical account balance investments. The U.S. Court of Appeals for the Fourth Circuit reversed the district court’s dismissal and reinstated the plaintiffs’ claims holding that financial injury is not a prerequisite for standing when the remedy being sought is disgorgement of… Continue Reading
ERISA fiduciary liability insurance policies protect fiduciaries and trustees of ERISA plans from personal liability. As fiduciary liability law changes, it is important to make sure that such policies cover the appropriate risks and to evaluate whether the coverages are sufficient and complete. Newer and more comprehensive policies not only cover breaches of fiduciary duty and administrative errors, but settlor and non-fiduciary functions and regulatory penalties as well. Companies should evaluate their policies and consider, depending on their needs, whether the following items are covered and/or should be covered under their policies: Coverage for costs and expenses of DOL and other regulatory audits/investigations. Coverage for claims involving settlor/non-fiduciary functions. Coverage for failures to comply with certain ERISA disclosure requirements. Coverage for ERISA 502(a)(3) equitable-relief claims. Coverage for non-exempt prohibited transactions under ERISA and the Internal Revenue Code. Coverage for plan benefit overpayments. Coverage to pay for costs involved in corrections… Continue Reading
In Tibble v. Edison International, announced on May 18th, the U.S. Supreme Court confirmed that fiduciaries have an ongoing fiduciary duty to monitor investments in retirement plans and to remove imprudent investments. The Court held that fiduciaries will not avoid potential liability simply because the six-year ERISA limitations period has run from the time the investment alternative for the retirement plan was originally selected, even if that original selection was prudent. The Court did not provide any further guidance on what the “duty to monitor” entails and instead remanded the case to the lower court to determine whether the fiduciaries in the case satisfied their duty to monitor. The opinion can be found here.
Under ERISA and the Internal Revenue Code, a fiduciary advisor must qualify for a “prohibited transaction exemption” (“PTE“) in order to receive compensation for providing fiduciary investment advice to plan sponsors, plan participants, and IRA owners. In addition to the proposed fiduciary regulation, the DOL’s “Conflicts of Interest” proposal includes new proposed PTEs and proposes changes to several existing PTEs. The most significant new PTE, the proposed “best interest contract exemption,” would require investment fiduciary advisors to, among other things, enter into contracts with investors that would commit the advisor to acting in the investor’s best interests in order to qualify for the exemption. Links to the proposed new and amended PTEs are available here.
On April 14, 2015, the DOL issued a comprehensive package of proposed regulations and related guidance designed to protect retirement plan sponsors, participants, and IRA owners from perceived conflicts of interest in the retirement investment advice industry. As part of the DOL’s “Conflicts of Interest” proposal, a new regulation defining who is a “fiduciary” by reason of giving investment advice to retirement plan investors (including IRA owners) has been proposed to replace the current regulation defining a fiduciary in the retirement investment advice context, which was issued in 1975. The proposed regulation would significantly broaden the number of advisors subject to a fiduciary standard by expanding the scope of what is considered investment advice. There are some notable “carve-outs” from the definition of investment advice, such as for investment education and sales pitches to fiduciaries of large plans. Links to the proposed regulations, a news release, FAQs, and a fact… Continue Reading
A participant sued both his employer and the insurance company with respect to a long-term disability (“LTD”) policy that had been purchased by the employer. The participant alleged an ERISA breach of fiduciary duty for the failure to increase LTD benefits in accordance with the terms of the summary plan description (“SPD”). The U.S. Court of Appeals for the Sixth Circuit ruled that the employer (1) functioned as an ERISA fiduciary when it prepared and distributed the SPD to participants, and (2) breached its fiduciary duty by furnishing the participant with a misleading SPD. In particular, the SPD provision describing the annual increase in benefits did not refer to the other sections of the SPD on which the employer and the insurer had relied to deny the benefits increase. Also, the insurer’s self-serving interpretation of the SPD to deny increased benefits was determined to constitute a breach of the insurer’s… Continue Reading