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Fiduciary Update | May 2016

Drew McCorkle
Vice President, Financial Advisor 


  • DOL Fiduciary Rule: ERISA Attorneys Popular Again
  • Fee Litigation Continues—Asset-Based Administration Fee Challenged
  • Recovery of Double Payment to Participant? 
  • Plan Auditor Not Liable for Contribution Failures
  • Pension Advances Fly Under the Regulatory Radar
  • No Liability If the “Right” Outcome Reached
  • Ex-spouse’s Plan Benefit Protected in Bankruptcy
  • Tidbits

DOL Fiduciary Rule: ERISA Attorneys Popular Again

The U.S. Department of Labor (DOL) released its long-awaited (and heavily lobbied) rule extending the definition of fiduciary. The rule is largely focused on the individual retirement account (IRA) market and advisors to IRA accountholders and dramatically increases the range of services and advisors covered by fiduciary rules. From a 401(k) and retirement plan perspective, the rule’s most direct impact will be on plans that work with an advisor that does not acknowledge its ERISA fiduciary role with the plan. Along with the new rule, the DOL issued or changed seven Prohibited Transaction Exemptions (PTEs) that carve out a variety of exceptions to the rule. The result is a complex network of options and constraints to be navigated. (Fed. Reg. Vol. 81, No. 68, p 20,946 Apr. 8, 2016)

Initial consultations with 401(k) recordkeepers indicate their beliefs that virtually every contact with plan participants is affected, particularly those related to participant education and advice. Additionally, all manner of communication with plan participants about rolling plan assets over to an IRA appears to be affected, with advisors and representatives of recordkeepers becoming subject to the ERISA fiduciary requirement to act in investors’ best interests. 

For retirement plans whose providers acknowledge their ERISA fiduciary role, two primary impacts are likely:

  • Recordkeepers may take differing approaches to the rule, and application of the new rule is likely to alter participant communications. Recordkeeper approaches could affect the monitoring role of plan fiduciaries. The rule is not intended to diminish beneficial participant education, and refinements can be anticipated.
  • The new rule could well result in more money remaining in 401(k) plans as broker incentives are diminished and participants benefit from plans’ lower-cost institutional funds. This would both help plan participants preserve their retirement savings and help plans retain and grow their total assets and buying power.

Bottom line, the rule expands the definition of fiduciary to make fiduciaries of virtually all advisors to IRAs and ERISA-covered plans. This is significant in that, of the $24 trillion retirement asset market, IRAs and defined contribution plans accounted for $7.3 trillion and $6.7 trillion, respectively, at the end of 2015. The DOL will continue to enforce these rules for retirement plans; the Internal Revenue Services (IRS) is responsible for enforcing the rules for IRAs. To help ensure enforcement, the rules for IRA advisors mandate contract provisions that follow ERISA’s fiduciary requirements. They also prohibit contract provisions that would interfere with enforcement by use of private class action lawsuits. In a concession to lobbyists, the effective date of the rule was delayed until April 2017, with some aspects further delayed until January 1, 2018.

Extensive additional commentary and reviews of this final regulation—and the seven affected PTEs—will be forthcoming from many quarters, and DOL leadership has said that it anticipates fine-tuning the rule over the next two years to avoid unintended consequences.

Fee Litigation Continues—Asset-Based Administration Fee Challenged

In yet another plan-fee lawsuit, Oracle has been sued. A key allegation, among others, is that it overpaid for plan administration services. Traudt v. Oracle Corporation (D. Colo. filed Jan. 22, 2016). A key allegation in this suit is that Oracle’s plan tripled in value from 2009 to 2014, while the recordkeeper, Fidelity, was retained on an uncapped percentage of assets basis. As a result, according to the complaint, the increase in assets increased the fees paid to Fidelity, but there was not a commensurate increase in the services provided. It is alleged that the appropriate manner for setting and paying fees of this type is on a per-participant basis.

The lawsuit also claims that Fidelity’s fees had not been subject to a competitive bid process for more than 25 years, and that this type of analysis should be done every three years. The case of George v. Kraft Foods Global, Inc. (7th Cir. 2011) is referenced. However, it is important to note that George did not mandate a competitive bid process. Rather, it considered whether the presence of a fee benchmark would support the dismissal of a case alleging excessive fees before trial. The court of appeals concluded that before the district court could dismiss the case, it had to consider whether it was prudent for the fiduciaries to rely on the benchmark to assess the reasonableness of fees.

Recovery of Double Payment to Participant?

Apparently you can have your cake and eat it too—if you are a plan participant. The Supreme Court resolved conflicting positions of the U.S. Circuit Courts of Appeal regarding when health plan fiduciaries can recover duplicate benefits paid to plan participants. This situation frequently arises in car accident situations when, after the plan has paid considerable sums for health benefits, the participant receives a settlement or court award from the person who hurt them. The employer’s health plan (usually) has a subrogation claim to be reimbursed from the participant’s settlement or award for the cost of the health care that the plan paid for. If the plan participant does not voluntarily reimburse the plan, the plan can sue. However, because ERISA provides that the plan fiduciaries can secure only “equitable” relief from the participant, a question arose about what must remain of the participant’s settlement amount or award for the plan to be able to recover.

The Supreme Court in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan (U.S. Jan. 20, 2016), held that if the settlement or award has been dissipated (spent on food, travel, and the like) and cannot be specifically traced, the plan cannot recover reimbursement from the participant’s other assets. In Montanile, the participant was injured in a car accident and the plan paid more than $100,000 in medical bills. The participant recovered $500,000 after the accident. His lawyer notified the plan that the proceeds would be distributed to the participant unless he heard from the plan within 14 days. He heard nothing and distributed the money. Six months later, the plan sought repayment and then sued. By then, the participant had spent the money. It is important for plans to have processes in place to manage situations of this type.

Plan Auditor Not Liable for Contribution Failures

Participants in a 401(k) plan were disappointed when their employer’s matching contributions were not made to the plan and their accounts not properly credited. The annual financial statement audits of the plan, which are filed with the annual form 5500, did not identify the employer’s unpaid contributions. Apparently lacking other sources of recovery, participants sued the plan auditor, alleging that, as a result of poor-quality audits, the employer deficiency was not identified and corrected. 

The claims were brought under state law, alleging negligent misrepresentation and professional malpractice. The negligent misrepresentation claim was denied because there was no evidence that the plaintiffs relied on the audit reports. The professional malpractice claim was denied because there was no real connection between the flawed audit and the employer’s failed contributions. This is a good reminder that plan financial statement audits have limited purpose and utility. Malinowski v. Lichter Group, LLC (D Md. 2016)

Pension Advances Fly Under the Regulatory Radar

Some unwitting retirees are falling prey to firms that promote pension advances. Through these complex transactions, a retiree who is drawing a pension agrees to assign future ongoing pension payments in exchange for an immediate lump sum payment. The structure of these transactions usually results in the retiree paying the equivalent of a 27 to 46 percent interest rate. However, the transactions are not characterized as loans, so usury and disclosure laws do not apply. Adding to the cost, some arrangements require the retiree to purchase life insurance that will pay the pension advance firm if the retiree dies sooner than anticipated. These programs are described in a U.S. Government Accountability Office report (GAO-14-420), which reports that 38 companies offer products of this type. Apparently military and other government retirees are primarily targeted. Few enforcement actions have been taken by states or the federal government (Consumer Financial Protection Bureau). Only two states have laws regulating pension advance companies.

No Liability If the “Right” Outcome Reached

After RJR Nabisco split into separate tobacco and food companies, a committee at R. J. Reynolds Tobacco Co. decided to eliminate Nabisco stock from the tobacco company’s 401(k) plan. The company’s committee was found to have been procedurally imprudent in making that decision. There was essentially no evidence that the committee investigated, analyzed, or considered the circumstances surrounding the Nabisco stock and whether it should be liquidated. After finding there was a process breach, the court turned to evaluating liability. 

Because the fiduciaries could not defend their decision based on a record of prudent analysis, the court assessed whether a prudent fiduciary would have made the same decision. That is, was the decision “objectively prudent”? This is to be distinguished from whether a prudent fiduciary could have made the same decision. After evaluating the facts and circumstances and extensive expert testimony, the court found that the tobacco company’s committee did act as a prudent fiduciary would have acted under the circumstances and found no liability. Tatum v. R.J. Reynolds Tobacco Co. (M.D. N.C. 2016)

Ex-spouse’s Plan Benefit Protected in Bankruptcy

We previously reported the Supreme Court’s decision in Clark v. Rameker (2014) that an inherited IRA is not protected in bankruptcy. Two recent cases have confirmed that the portion of a retirement plan interest that a plan participant’s former spouse receives as part of a divorce is protected from bankruptcy—regardless of whether a formal qualified domestic relations order (QDRO) is in place at the time of the bankruptcy filing. Crawford v. Hertzberg (W.D. Pa. 2015); Walsh v. Dively (W.D. Pa. 2016)


  • DOL Examining Required Distribution (age 70½) Compliance—The DOL has announced informally that it is investigating whether plans are complying with ERISA’s minimum distribution requirements, under which payments must commence by the April 1 after the participant reaches age 70½ . The current focus of this effort is large plans and terminated vested participants. Initial indications suggest that considerable sums are likely (past) due to these participants. In addition to DOL issues, failure to make minimum distributions under this rule carries a potential 50 percent tax penalty to the participant. Plan sponsors should be sure the administrators of their plans are tracking participant ages and properly handling pay status.
  • Float Income as a Plan Asset Not Sunk Yet—As previously reported, the U.S. District Court for the District of Massachusetts determined that float income earned by Fidelity on plan assets is not also a plan asset. In Re Fidelity ERISA Float Litigation (2015). The case is now on appeal, and the DOL has been invited to participate. The DOL submitted a brief in support of its argument that float income should be credited to the plan. Oral argument was scheduled for early March. In the current low-interest-rate environment, there has been essentially no short-term interest to produce float income. However, when float is again produced, plan fiduciaries should take it into consideration when evaluating plan economics.
  • Church Plans of Hospitals Not Necessarily Exempt from ERISA—Respecting the U.S. Constitution’s separation of church and state, ERISA does not cover so-called church plans. A number of church-affiliated organizations, frequently hospitals, have claimed church status and exemption from ERISA. At bottom, the issue is whether these plans are required to meet ERISA’s funding requirements. Several plan participant groups have filed suit successfully challenging the church status of hospital plans. A recent example is Stapleton v. Advocate Health Care Network (7th Cir. 2016), in which a 12- hospital system with 250 other inpatient and outpatient locations is affiliated with the Evangelical Lutheran Church and the United Church of Christ. The linkage of the healthcare system with the religious organizations was found not to meet ERISA’s definition of a church plan. As a result, the plan must comply with ERISA, including its funding requirements.
  • Plan’s Venue Choice Enforced … Participant Suit Dismissed—A pension plan was amended in 2001 to include a restricted venue provision, requiring that any suit with respect to the plan be filed in Cedar Rapids, Iowa. A participant who was challenging a decision of the plan’s pension committee filed suit in federal court in Kentucky. The case was dismissed because it violated the pension plan’s venue provision, and the court of appeals affirmed. Smith v. Aegon Companies Pension Plan (6th Cir. 2014). The Supreme Court has just declined to hear the case, noting that there is not a conflict among the circuit courts of appeal. The DOL had argued to both the court of appeals and the Supreme Court that the venue restriction should be overturned.
  • No Imputed Income for Cost of Identity Theft Protection—The IRS has previously announced that it would not seek income tax treatment for the value of identity theft protection services provided by employers or others to individuals whose privacy may have been breached. Following the receipt of four comments on this guidance, the IRS announced early this year that this exemption from income is being extended to all provisions of identity theft protection services, regardless of whether a breach has occurred or is suspected. IRS Announcement 2016-02 (Jan. 19, 2016)