Timely, relevant, and actionable investment perspective, best practices, and planning insights for institutional and wealth management clients from CAPTRUST's Consulting Research Group.

Advanced Filter

Fiduciary Update | August 2016

Drew McCorkle
Vice President, Financial Advisor 


  • DOL Fiduciary Rule—Developments and Practical Steps for Plan Sponsors and Fiduciaries
  • Fee Litigation Continues—A Settlement and New Claims
  • Fee Litigation Extending to Smaller Plans
  • Who Must Prove Eligibility for a Pension?
  • Health Plan Claims Processing and Issues
  • Kodak Employer Stock Case Settled
  • Tidbits

DOL Fiduciary Rule—Developments and Practical Steps for Plan Sponsors and Fiduciaries

As anticipated, the U.S. Department of Labor’s (DOL’s) long-awaited rule extending application of the Employee Retirement Income Security Act’s (ERISA’s) fiduciary rules has received considerable attention. The rule is largely focused on the $7.3 trillion (and growing) individual retirement account (IRA) market, which has not been subject to ERISA-like standards mandating that advisors act in the investor’s best interest. The new rule has limited direct impact on retirement plans, particularly those served by advisors who acknowledge their fiduciary role. 

Following are current developments and some practical steps for retirement plan sponsors and fiduciaries.

Failed Congressional Challenge—Congress passed legislation that would have prevented the expanded fiduciary rules from taking effect. That resolution was vetoed by President Obama and lacked support in the Senate for a veto override.

Outstanding Court Challenges—So far, five lawsuits have been filed seeking to prevent implementation of the DOL’s new rule. Filed in three federal courts, the suits make wide-ranging allegations, including violation of the First Amendment’s free speech protections, violations of the Fourth Amendment’s due process protections, and violations of the rules governing federal agencies’ issuance of regulations, among others. We expect these suits will be decided without lengthy proceedings.

Retirement Plan Impacts—Retirement plan sponsors and fiduciaries should expect adjustments by service providers to their participant services, communications, processes, roles, agreements and fees. One byproduct that many expect is that more former employees’ assets will remain in plans.

Practical Next Steps—Retirement plan sponsors and fiduciaries should take the following next steps as implementation of the rule and its implications are more fully understood:

  • Understand the fiduciary roles of all plan providers and their potential conflicts, and how they may change, including careful evaluation of any contract and fee changes.
  • Understand all plan providers’ compliance policies and procedures—particularly those who provide participant communications—to avoid the influence of potential conflicts.
  • Evaluate if the potential for conflicted advice alters who will be permitted to provide advice to plan participants.
  • Evaluate the impact of more former employees’ assets remaining in the plan, and consider whether current plan offerings should be adjusted. For example, target date funds’ “to retirement” versus “through retirement” glidepath strategy may be affected.
  • Determine if any plan design changes may be appropriate if more assets remain in the plan from former employees and retirees. For example, require only lump-sum distributions, or permit partial distributions.

As implications of the new rule crystallize over time, we will have additional thoughts on specific steps for plan sponsors and fiduciaries.

Fee Litigation Continues—A Settlement and New Claims

Massachusetts Mutual Life Insurance Company has settled a lawsuit alleging that it mismanaged its 401(k) plan, agreeing to pay nearly $31 million, of which $10 million will likely be sought as attorneys’ fees. It is notable that the settlement includes a four-year ban on calculating recordkeeping fees as a percentage of plan assets. This is consistent with the emerging trend of moving to flat per-participant fees. Gordon v. Mass Mutual Life Ins. Co. (D. Mass 2016).

Fidelity has been sued by participants in the Delta Family-Care Savings Plan. (Delta Air Lines is not a party to the suit.) Fleming v. Fidelity (D. Mass).

The suit alleges that:

  • Fidelity is receiving significant compensation from online advice provider Financial Engines, whose service is available to plan participants, unreasonably inflating the price of the investment advice offered, and
  • The self-directed brokerage program offered in the plan offers share classes of the available investments with high expense ratios producing excess revenue to Fidelity.

Fee Litigation Extending to Smaller Plans

Two recent cases alleging the overpayment of fees from plan assets involve plans with $10 million and $25 million in plan assets. To date, most fee litigation has involved multibillion-dollar plans. The suit against fiduciaries of the $10 million plan was dismissed by the plaintiffs not long after it was filed. However, the suit against fiduciaries of the $25 million plan is ongoing, alleging that the investments offered in the plan had excessive expenses, including an S&P 500 index fund with an expense ratio of 60 basis points. By comparison, Vanguard offers an S&P 500 indexed fund with an expense ratio of 5 basis points that is generally available to smaller plans. Bernaola v. Checksmart Financial, LLC (S.D. Ohio 2016).

Who Must Prove Eligibility for a Pension?

If there is a dispute, plan participants must usually prove their entitlement to pension benefits. However, in Estate of Barton v. ADT Security Services Pension Plan, the U.S. Court of Appeals for the 9th Circuit found that—after a participant has made an initial showing that he or she may be entitled to a pension benefit—when the plan sponsor controls the information necessary to determine eligibility, the plan sponsor must produce the facts and information needed.

A former employee, who worked at ADT from November 1967 to September 1986, applied for pension benefits upon reaching age 65. The plan administrator said he was ineligible for a pension benefit and invited him to provide evidence such as a letter stating that he had a vested benefit. He did not have such a letter, but he did have a variety of items evidencing the period of his employment, including a letter from the company president congratulating him on 10 years of service, W-2 forms, a Social Security work summary reflecting work with the plan sponsor, and resignation documentation. The plan committee denied his request, noting that there were no plan records indicating his eligibility or plan participation. He appealed this denial, submitting more documentation of his work with the plan sponsor. This appeal was also denied because he could not prove that he had at least 1,000 hours of work during his years at ADT.

The U.S. District Court upheld the benefit denial, which was appealed to the U.S. Court of Appeals for the 9th Circuit. In a significant departure from current law, the Court of Appeals shifted the obligation to the plan sponsor to produce evidence of whether the former employee is eligible for a pension benefit, after the former employee makes an initial showing of possible eligibility.

Health Plan Claims Processing and Issues

ERISA governs health benefit claims handling. The conclusions of two recent cases in this area are of interest:

  • If a plan does not follow its own rules—or the DOL’s rules—in handling claims for benefits, the court will not give deference to the plan fiduciaries’ decision. Rather, it will substitute its own judgment. However, inadvertent and harmless compliance failures will be overlooked. Halo v. Yale Health Plan (2nd Cir. 2016).

A Yale student insured under the Yale Health Plan received non-emergency health care at home and out of the Yale Health Plan network without preapproval. Her claims for coverage of these services were denied. She sued, alleging that the DOL’s rules for consideration of health benefit claims had not been followed. Following extensive litigation, including two district court opinions and two appellate court opinions, the matter was resolved upon finding that the Yale Health Plan substantially followed its own procedures, which did not violate the DOL’s regulations.

  • A plan participant may bring a claim of intentional infliction of emotional distress based on how he was treated during the review of a total disability claim. The emotional distress claim is not preempted by ERISA. Kresich v. Metropolitan Life Insurance Company (N.D. Cal. 2016).

A former Kaiser Permanente executive sought total disability benefits based on chronic back pain. He alleged that the plan and insurance company knew of his “physical disabilities and weak emotional state,” unnecessarily prolonged the review of his claim, alleged dishonesty on his behalf, and required unnecessary medical examinations that would cause discomfort. Although ERISA includes broad preemption provisions—displacing other laws that relate to employee benefits—this case was allowed to proceed. The court reasoned that while the claim is related to an ERISA plan, it is independent of ERISA plan benefits, and without this claim there would be no avenue for relief.

Kodak Employer Stock Case Settled

Following the widely reported case of Fifth Third Bancorp v. Dudenhoeffer, in which the Supreme Court of the United States struck down the fiduciary-friendly presumption that employer stock is a prudent retirement plan investment, a decision involving Kodak’s 401(k) plan had been anticipated. Unlike Dudenhoeffer, which presented a dramatic drop in the stock price of a company that was otherwise assumed to be a prudent investment at the time the stock price fell, Kodak presented the fundamental issue of whether Kodak stock was a prudent retirement plan investment, independent of fluctuations in the stock price.

However, judicial guidance on this aspect of employer stock cases will have to wait for another day, as the Kodak case was settled for $9.7 million, with approximately $3 million expected to be awarded in attorneys’ fees. Gedek v. Perez (W.D. NY 2016).


  • One-third of Retirement Plans Have Been Audited in the Past Two Years—According to the Willis Towers Watson U.S. Retirement Plan Governance Survey, 31 percent of the survey’s 300 retirement plan sponsor respondents have had their plans audited by either the Internal Revenue Service or DOL in the last two years. Roughly half of employers with at least 25,000 employees have faced an audit over the same period.
  • When an Investor Becomes a Plan Sponsor—Under the law applicable to pension plan terminations, all members of a controlled group of companies are responsible for the others’ pension obligations if one of them terminates its pension without enough assets to meet all plan obligations. For this purpose, “control” generally means 80 percent ownership or more. In an unusual case, two limited partnerships owned 30 percent and 70 percent, respectively, of a troubled company that went bankrupt and withdrew from a multiemployer pension plan—with $4.5 million of liability. The U.S. District Court for the District of Massachusetts found the two limited partnerships to be in a “deemed partnership” that owned 100 percent of the troubled company. As a result, the limited partnerships are responsible for the $4.5 million pension liability.
  • Supreme Court Sends Pension Risk Settlement Case Back for Further Review—Several large pension plans have entered into transactions in which annuities are purchased to settle benefit obligations for terminated vested participants. This transaction removes both the liabilities and the assets associated with the settled group from the plan and rests them with an insurance company. Prior court challenges to this practice have failed. However, in Pundt v. Verizon Communications, the Supreme Court vacated a decision of the U.S. Court of Appeals for the 5th Circuit (May 23, 2016), sending it back for reconsideration. The short Supreme Court order directed that it be re-evaluated in light of the recent decision in Spokeo, Inc. v. Robins, which centered on whether the plaintiffs had sufficiently alleged an actual injury that would allow the case to go forward.
  • Maryland Joins States with Mandatory Retirement Programs—Maryland has joined the states mandating that private sector employers participate in automatic enrollment retirement programs. The program will not apply to employers who sponsor a retirement plan. Although the new program was effective July 1, 2016, it is expected to go into effect after regulatory details have been worked out.