Retirement Updates
Latest Retirement Updates
On May 23, 2024, in Moore et al v. Humana Inc. et al., the US District Court for the Western District of Kentucky (the court) granted summary judgment in favor of defendants Humana Inc. and the Humana Retirement Plans Committee (the defendants) in their roles as plan sponsor and fiduciary of the Humana Retirement Savings Plan (the plan). The class action case, filed in 2021, alleged a breach of the ERISA fiduciary duty of prudence in administering the plan due to excessive recordkeeping fees. The plaintiffs also claimed Humana failed to adequately monitor other fiduciaries.
The defendants retained Charles Schwab (Schwab) as their plan recordkeeper after issuing requests for proposals (RFPs) and evaluating the responses thereto. They also performed annual benchmarking using reports from third-party consultants. Nonetheless, the plaintiffs contended that the defendants used an “imprudent process” to administer the plan and that Schwab’s recordkeeping fees were unreasonably high.
Both parties motioned for summary judgment and to exclude the other party’s expert witness testimony. The court denied the plaintiffs’ motion to exclude the testimony of the defendants’ expert, Pete Swisher. Swisher’s opinion, based on his experience and industry knowledge, was that reliance on RFPs and benchmarking reports resulted in a prudent process.
However, the court granted the defendants’ motion to exclude the testimony of the plaintiffs’ expert, Veronica Bray. Bray attempted to compare Humana’s recordkeeping fees to those of other retirement plans but did not provide a reasonable explanation for the choice of the specific plans used for the comparison. Therefore, the court determined that Bray’s opinion did not provide any reliable methodology to address whether the defendants’ process was prudent and whether their plan’s recordkeeping fees were excessive relative to the services rendered.
The court then turned to the motions for summary judgment and explained that for the plaintiffs to prevail on their claims, they must show both that the defendants breached their fiduciary duty of prudence and that Schwab’s recordkeeping fees were ultimately unreasonable. The defendants argued that a prudent fiduciary would recognize that the fees were excessive and negotiate reasonable fees but significantly, could not cite a defect in the plan’s process for monitoring recordkeeping fees.
Upon review, the court found the plaintiffs’ argument that the plan’s failure to have a fee policy statement amounted to an imprudent process unpersuasive. Second, the court noted that ERISA imposed no explicit duty on the defendants to attempt to negotiate a lower fee. Rather, the defendants maintained that their method for ensuring the fee remained reasonable (i.e., using RFPs and annual benchmarking) was a responsible method and consistent with industry practices. Additionally, the defendants pointed out that their RFP process accounted for a broad set of factors beyond price alone, including the plan’s size, relationship with Schwab, Schwab’s compensation, and Schwab’s services and offerings. Furthermore, the court observed that ERISA does not require fiduciaries to scour the market for the cheapest available option.
As a result, the court found that the plaintiffs failed to prove that the defendants’ vendor selection process was not prudent and the fees were excessive. Because the defendants were entitled to summary judgment on their breach of fiduciary duty claim, their derivative failure to monitor claims also failed.
This ruling is instructive in highlighting a court’s considerations when determining if a retirement plan fiduciary’s exercise of discretion in selecting a service provider is reasonable. The case serves as an important reminder to employers of their ERISA fiduciary obligations to prudently select and monitor vendor relationships and to carefully document their processes.
On May 1, 2024, the Second Circuit declared provisions of an employee stock ownership plan (the Plan) that required participants to resolve any legal claims arising out of or relating to the Plan in individualized arbitration “null and void” because they amounted to prospective waivers of participants’ substantive statutory rights and remedies under ERISA.
The plaintiff, Ramon Cedeno, was an employee of Strategic Financial Solutions, LLC, and a participant in its Plan. Because the Plan had incurred substantial losses after its trustee, Argent Trust Company, purchased shares of Strategic Family, Inc. and their wholly owned LLCs, including Strategic Financial Solutions, Cedeno brought a class action suit against Argent in the United States District Court for the Southern District of New York. The suit alleged that Argent breached its fiduciary duties to Plan participants because it had purchased the shares for more than fair market value and sought several forms of relief under Section 502(a)(2) of ERISA, including restoration of Plan-wide losses, surcharge, accounting, constructive trust on wrongfully held funds, and disgorgement of profits gained from the transaction.
The defendants moved to compel arbitration in the matter on the grounds that the Plan included mandatory arbitration provisions expressly limiting any relief sought under Section 502(a)(2) to the restoration of losses within a participant’s individual account and prohibiting any relief that would benefit any other employee, participant, or beneficiary, or otherwise bind the Plan, its trustee, or administrators. In support of their motion, the defendants argued that the Federal Arbitration Act (FAA) “requires courts to enforce arbitration agreements rigorously according to their terms.”
The trial court denied the defendants’ motion and the Second Circuit affirmed that decision, holding that enforcing the Plan’s mandatory arbitration provisions would prevent Cedeno from effectuating the right to plan-wide relief guaranteed through ERISA. Accordingly, the Second Circuit also endorsed the trial court’s position that the “effective vindication doctrine,” which holds that provisions within an arbitration agreement that prevent a party from effectively vindicating statutory rights are not enforceable, rendered the FAA inapplicable to these provisions, notwithstanding that statute’s otherwise broad applicability to arbitration agreements in general.
With its decision, the Second Circuit joins the Third, Seventh, and Tenth Circuits with its application of the effective vindication doctrine to ERISA plans that include mandatory arbitration clauses such as those in this case. Only the Ninth Circuit had enforced plan language requiring arbitration and limiting actions to individual arbitrations, though this was before the effective vindication doctrine had begun to evolve. Notably, the DOL has signaled its support of the effective vindication doctrine as amicus curiae to the Sixth Circuit by asking the court to apply the Second Circuit’s reasoning in this case to a pending appeal with similar facts.
The effect of mandatory arbitration provisions in benefit plans subject to ERISA is a developing area of the law. Plan sponsors that already include such language in their plans or are considering including such language in their plans should consult closely with counsel.
On May 19, 2024, the IRS issued FAQs regarding special rules for distributions from retirement plans, IRAs, and retirement plan loans for certain individuals impacted by federally declared major disasters. The SECURE 2.0 Act provided the framework for ongoing disaster relief for these distributions for affected individuals, and the FAQs are intended to provide information on disaster relief options that may be available. It is important to note that the FAQs are only intended to provide general guidance and cannot be relied upon by the IRS to resolve a case.
The FAQs are divided into four sections:
- General information: These FAQs provide basic information to identify qualified individuals, to identify qualified disasters, and to provide a basic understanding of the expanded distribution rules which are optional for employers.
- Taxation and reporting of qualified disaster recovery distributions: These FAQs provide details including information on the application of income tax and how both qualified individuals and plans should report the distributions.
- Repayments of qualified distributions for purchasing or constructing a principal residence in a qualified disaster area: These FAQs describe the criteria for purchasing or constructing a principal residence in a qualified disaster area and provide details on repayment options.
- Loans from certain qualified plans: This FAQ clarifies both the allowable loan repayment delay and the increased loan limits under the SECURE 2.0 Act.
Employers who sponsor retirement plans should be aware of the new guidance and work with service providers as needed if they allow these special distributions.
On May 17, 2024, the DOL published an interim final rule amending their Abandoned Plan Program regulations, which provide procedures for the termination of individual account retirement plans (such as 401(k) plans) that have been abandoned by their sponsoring employers. Among other items, the 2024 interim final rule makes the Abandoned Plan Program available to Chapter 7 bankruptcy trustees who administer a bankrupt company’s retirement plan.
Significant business events, including bankruptcies, can result in abandoned plans (i.e., plans without a responsible plan sponsor or administrator). In 2006, the DOL adopted the Abandoned Plan Program regulations to allow plan custodians, such as banks and insurers, to wind up an abandoned plan’s affairs and distribute plan benefits to participants and beneficiaries. Under the regulations, eligible custodians accepting such plan termination obligations are called Qualified Termination Administrators (QTAs). QTAs must notify the DOL before and after winding up an abandoned plan, locate and update plan records, calculate benefits payable, notify participants and beneficiaries, distribute benefits, and file a final Form 5500. Under Prohibited Transaction Exemption (PTE) 2006-06, QTAs are provided conditional relief from ERISA’s prohibited transaction rules for their services and related compensation.
However, the 2006 regulations did not extend the Abandoned Plan Program to Chapter 7 bankruptcy trustees who oversee and manage a bankrupt company’s plan. Under federal bankruptcy law, if a company in liquidation administered an individual account retirement plan, the company's Chapter 7 bankruptcy trustee must continue to perform plan administration functions.
The 2024 interim final rule and related amendment to PTE 2006-06 update the Abandoned Plan Program to allow a Chapter 7 bankruptcy trustee or an “eligible designee” to be a QTA and wind up the bankrupt company’s retirement plan. An eligible designee can be either a custodian QTA (as explained above) or an independent bankruptcy trustee practitioner meeting certain requirements. In addition to following the general Abandoned Plan Program procedures, the bankruptcy trustee must follow special rules to address any delinquent contributions owed to the plan. Additionally, the trustee is responsible for selecting and monitoring any eligible designee in accordance with ERISA’s fiduciary requirements and reporting to the DOL any suspected breaches involving plan assets by a prior plan fiduciary.
ERISA retirement plan sponsors should be mindful of their fiduciary obligations to a terminating retirement plan, including in situations in which the plan termination results from a significant business event or reorganization. These fiduciary obligations include updating the plan documents, notifying plan participants and beneficiaries, distributing plan assets, and filing a final Form 5500. In the event of the plan sponsor’s Chapter 7 bankruptcy, the DOL’s new amendments to the Abandoned Plan Program regulations and PTE 2006-06 will allow Chapter 7 bankruptcy trustees to effect the termination of an abandoned individual account retirement plan and distribute the benefits to participants and beneficiaries.
The 2024 interim final rule and amendment to PTE 2006-06 are effective July 16, 2024, so bankruptcy trustees can rely on this guidance on or after that date. The DOL is also seeking public comments on the amendments, which can be submitted through July 16, 2024.
On April 23, 2024, the DOL released the final Retirement Security Rule (the 2024 final rule) defining who is an investment advice fiduciary for purposes of ERISA and the Code. The DOL also issued final amendments to class prohibited transaction exemptions (PTEs) available to investment advice fiduciaries. The 2024 final rule follows and largely resembles a proposed rule issued on November 7, 2023. Please see our November 7, 2023, edition of Compliance Corner regarding the proposed rule.
The 2024 final rule represents the DOL’s most recent effort to significantly expand the definition of an investment advice fiduciary with respect to retirement investors. (A prior and similar 2016 DOL fiduciary rule was set aside as arbitrary and capricious by the Fifth Circuit Court of Appeals (Fifth Circuit) in litigation.) Under the 2024 final rule, retirement investors include not only ERISA retirement plan participants but also IRA owners, HSA accountholders, and fiduciaries with authority or control with respect to an ERISA plan or IRA. The DOL maintains the updates are necessary to protect retirement investors by addressing gaps in their relationships with financial professionals whose investment recommendations (e.g., regarding IRA rollover assets) are not currently treated as fiduciary advice under ERISA or other federal or state laws.
The 2024 final rule’s new investment advice fiduciary definition replaces the current five-part test that was adopted by the DOL in 1975. The DOL now views the 1975 rule as insufficient and underinclusive, given changes in retirement savings vehicles and the investment advice marketplace.
Under the 2024 final rule, a person is an investment advice fiduciary if they directly or indirectly (e.g., through or together with any affiliate) make professional investment recommendations to investors on a regular basis as part of their business and the facts and circumstances objectively indicate that the recommendation:
- Is based on review of the retirement investor’s particular needs or individual circumstances.
- Reflects the application of professional or expert judgment to the retirement investor’s particular needs or individual circumstances.
- May be relied upon by the retirement investor as intended to advance the retirement investor’s best interest.
The recommendation must be provided for a fee or other compensation, direct or indirect, as defined in the final rule.
Additionally, an investment advice fiduciary includes a person who represents or acknowledges that they are acting as an ERISA fiduciary with respect to the recommendation.
Under the 2024 final rule, the determination of whether a recommendation has been made is aligned with the SEC’s “best interest” framework, which considers factors such as whether the communication could reasonably be viewed as a “call to action” that would influence an investor to trade a particular security. The more individually tailored the communication to a specific customer or targeted group about an investment, the greater the likelihood that the communication may be viewed as a recommendation. Conversely, offering general investment information or educational materials to investors would generally not be considered a recommendation and investment advice.
Unlike the 1975 rule, the 2024 final rule does not require that advice be provided pursuant to a mutual agreement or as the primary basis for investment decisions to be deemed fiduciary advice. As a result, the 2024 final rule has raised concerns among some industry stakeholders that certain financial professionals, such as insurance agents and brokers, will potentially be deemed fiduciaries by a transaction in which a retirement investor accepts their recommendation of a particular investment.
In fact, on May 2, 2024, a lawsuit, Federation of Americans for Consumer Choice, Inc. v. DOL, was filed against the DOL by a trade organization whose members include insurance agents. The lawsuit challenges, among other items, the DOL’s authority to issue the 2024 final rule under ERISA and the Code. The complaint asserts that the DOL’s fiduciary definition in the 2024 final rule is inconsistent with Congress’s intent as expressed in the text of ERISA and the Code, the historical and common law understanding of the term (based on a special relationship of trust and confidence), and the standards previously articulated by the Fifth Circuit. The lawsuit requests that the 2024 final rule and related amendments to PTE 84-24 (which provides protection for ERISA/IRA transactions when commissions are collected in connection with an annuity purchase) be vacated and that the DOL be enjoined from enforcing the new guidance.
Generally, the 2024 final rule and PTE amendments are scheduled to take effect on September 23, 2024, although there is a one-year transition period after the effective date for certain conditions in the PTEs. However, the legal challenges could potentially affect the implementation of the 2024 final rule.
ERISA retirement plan sponsors should be aware of the issuance of the 2024 final rule, which may impact the role of financial professionals interacting with plan fiduciaries or participants. They should also continue to ensure that ERISA plan investment decisions are made in the best interest of participants and beneficiaries and that the investment decision-making process is clearly documented. Sponsors should also monitor for further developments, which we will report on in future Compliance Corner editions.
On April 16, 2024, the DOL issued a request for public comment on its proposal to create a database to allow individuals to locate former retirement plan information. This searchable database would help implement the requirement under the SECURE 2.0 Act to more easily allow individuals to obtain plan administrator contact information.
Prior DOL initiatives under the existing Terminated Vested Participants Project (TVPP) for defined benefit pension plans indicate retirement plan administrators often lose track of participants and beneficiaries. Similarly, participants and beneficiaries often lose track of their own past accounts. In some cases, recordkeeping challenges, business closures, or mergers and acquisitions activity may result in accounts becoming “lost.” The proposed Retirement Savings Lost and Found database aims to facilitate the reunification of participants and beneficiaries and their prior accounts.
The DOL’s request asks for voluntary participation from plan administrators and indicates administrators can attach the information to their 2023 Form 5500 filing. Interested parties may submit comments through June 17, 2024.
The IRS recently issued Notice 2024-35, which updates and extends the transition relief provided in Notice 2023-54, which addressed changes made by the SECURE Act and the SECURE 2.0 Act in required minimum distribution (RMD) requirements for qualified plans such as 401(k) plans, IRAs, Roth IRAs, 403(b) plans, and 457(d) eligible deferred compensation plans. (For further information on prior Notice 2023-54, please see our August 1, 2023, Compliance Corner article.)
The SECURE Act originally increased the age for determining an individual’s required beginning distribution date from 70 1/2 to age 72. The SECURE 2.0 Act then increased that to age 73 beginning January 1, 2023. Periodically, the IRS has issued transition relief to help plan administrators and others implement these changes to the RMDs. For example, Notice 2023-54 updated previous relief relating to otherwise required RMDs to beneficiaries after the deaths of participants (otherwise known as “specified RMDs”) in 2020 and 2021 to include the same for otherwise required RMDs related to participant deaths in 2022.
Notice 2024-35 essentially extends this relief for another year, meaning that plans will not be treated as failing to satisfy the RMD rules for the failure to make a specified RMD in 2024 related to a participant’s death in 2023, nor will a taxpayer be subject to an excise tax for having failed to take a specified RMD.
Employers should be aware of this extension of the previous transition relief and consult with their advisors for further information.
Notice 2024-35, Certain Required Minimum Distributions for 2024 »
On April 2, 2024, the DOL announced that it amended a rule that provides an exemption for qualified professional asset managers (QPAMs). A QPAM is defined as a bank, savings and loan association, insurance company, or registered investment adviser that assists retirement plans in making financial investments. QPAMS are particularly useful in that they can facilitate transactions that would otherwise not be allowed under ERISA, through the exemption granted by the DOL. The amendment clarifies language in the original rule, including what misconduct can render a QPAM ineligible for the exemption. The amendment:
- Requires a QPAM to provide a one-time notice to the DOL that it is relying upon the exemption.
- Updates the list of crimes enumerated in the original rule to explicitly include foreign crimes that are substantially equivalent to the listed crimes.
- Expands the circumstances that may lead to ineligibility.
- Provides a one-year winding down (transition) period to help plans and IRAs avoid or minimize possible negative impacts of terminating or switching QPAMs or adjusting asset management arrangements when a QPAM becomes ineligible pursuant to the original and gives QPAMs a reasonable period to seek an individual exemption, if appropriate.
- Updates asset management and equity thresholds in the QPAM definition.
- Clarifies the requisite independence and control a QPAM must have with respect to investment decisions and transactions.
- Adds a standard recordkeeping requirement.
Sponsors of ERISA retirement plans should be aware of these new clarifications and procedures for evaluating whether a QPAM is eligible for the exemption.
Amendment to Prohibited Transaction Class Exemption 84-14 for Transactions Determined by Independent Qualified Professional Asset Managers (the QPAM Exemption) »
DOL Amendment to QPAM Exemption Announcement »
NFP Corp. and its subsidiaries do not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.