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In this article we review retirement policy developments in 2014 that affected defined contribution plans. We include discussions of proposals to expand coverage and for fundamental tax reform, both of which, while not limited to DC plans, do focus generally on them. In a follow-up article we will discuss 2014 defined benefit plan issues.
There was continued focus in 2014 on 401(k) plan fees, particularly from participant advocate groups. In April, the Center for American Progress released a report “Fixing the Drain on Retirement Savings — How Retirement Fees Are Straining the Middle Class and What We Can Do about Them.” The report got attention for a couple of reasons. First, CAP is a fairly important voice in the progressive wing of the Democratic Party. And, second, the policy proposals in the report – e.g., cigarette-label type ‘warnings’ about high fee funds in 401(k) plans – were innovative.
Also receiving significant attention was the paper by law professors Ian Ayres (Yale) and Quinn Curtis (University of Virginia) Beyond Diversification: The Pervasive Problem of Excessive Fees and ‘Dominated Funds’ in 401(k) Plans. That paper attempted to quantify 401(k) plan participant losses due to sponsor-fiduciary fund menu construction decisions, participant asset allocation mistakes, and high fees on plan investment options. The paper proposed several innovative changes to ERISA fiduciary and 401(k) plan fund menu construction rules.
Finally, as a follow up to its 2012 408(b)(2) regulations (rules governing provider-to-sponsor fee disclosure), in March DOL proposed a regulation that, if adopted, would require that in certain circumstances service providers provide a separate guide or ‘roadmap’ to those disclosures.
In a major development in 401(k) fee litigation, in October 2014 the Supreme Court agreed to hear an appeal from the plaintiffs in Tibble v. Edison International. The Court will only be considering the statute of limitations issue in that case, but that issue, while technical, may have significant implications for 401(k) plan fiduciaries. The lower court dismissed claims with respect to 3 allegedly ‘overpriced’ funds that were added to the plan’s fund menu more than 6 years before the suit was filed. Plaintiffs are arguing that the continued inclusion of those funds in the fund menu constitutes an ongoing violation and is therefore within ERISA’s 6-year statute of limitations. Supreme Court agreement with their argument would heighten scrutiny of the ongoing monitoring of fund fees.
Also in connection with 401(k) plan fees, the 8th Circuit Court of Appeals decided the appeal in Tussey v. ABB, affirming the lower court’s holdings against the ABB fiduciaries with respect to recordkeeping fees, but vacating and remanding the holdings on plaintiffs’ investment selection and mapping claims. In reviewing the lower court’s (2012) decision in Tussey, we identified the following takeaways:
1. The employer is a litigation target in 401(k) fee cases.
2. Trust and recordkeeping fees are a litigation target.
3. Revenue sharing is a target.
4. Investment policy statements can make you a target.
5. Language in consultant’s reports can be used to prove plaintiff’s case.
After the 8th Circuit’s decision, Takeaways 1-3 and 5 still apply. Takeaway 4 – investment policy statements as a possible pretext for litigation – requires some revision. Counsel for defendant-fiduciaries are still likely to be concerned about procedures in an investment policy statement that are (as the 8th Circuit describes the one for ABB’s Plan) ‘informally implemented.’ In a footnote/aside, however, the 8th Circuit commented: “[W]e are concerned that construing all investor policy statements as binding plan documents will discourage their use, and we question whether a policy statement like the one in this case – informally implemented to provide a framework for administering the Plan itself – constitutes a binding Plan document.” Thus, this decision should give some comfort to plan fiduciaries concerned that, in adopting an investment policy statement, they have in effect created a whole new set of rules they can be sued over.
On June 25, 2014, the Supreme Court handed down its unanimous decision in Fifth Third Bancorp et al. V. Dudenhoeffer. In this decision, the Court rejected the rule applied by many courts that ESOP fiduciaries had a ‘presumption of prudence’ with respect to company stock investments. More importantly, however, it instructed the 6th Circuit to reconsider its rejection of the defendants’ motion to dismiss, on the principles that (oversimplifying somewhat) (1) fiduciaries with respect to publicly traded ESOP stock may generally rely market prices and (2) issues with respect to insider information may generally be better dealt with under the securities laws.
The Supreme Court’s Fifth Third decision represented a fundamental change in stock drop litigation jurisprudence. It’s not clear, however, whether it will change outcomes or reduce the amount of stock drop litigation. There were, in 2014, two subsequent appeals court cases both of which allowed the plaintiffs to proceed with stock drop-based claims.
In the first, Tatum v. R. J. Reynolds Tobacco Company, a ‘reverse stock drop’ case, the 4th Circuit seemed to approve consideration of, e.g., a stock’s ‘strong fundamentals’ in assessing the prudence of a sale, rather than, as the Supreme Court recommended in Fifth Third, simply relying on the market price.
In the second, Harris v. Amgen, in a case in which plaintiffs claimed fiduciaries failed to act on inside information that company stock was overvalued, the 9th Circuit seemed to allow a claim under ERISA rather than, as the Supreme Court recommended in Fifth Third, deferring to securities law insider trading rules.
We also note that many believe that the exception to market-based principles the Supreme Court in Fifth Third allowed for ‘special circumstances’ will often provide a pretext for courts to allow plaintiffs lawyers to get past a motion to dismiss.
Thus, the legacy of Fifth Third remains up in the air: we will have to wait for ongoing litigation to see how it will be applied.
A consistent critique of current retirement savings policy and the 401(k) system has been that it does not cover enough American workers. According to Senator Harkin (D-IA) 75 million American workers are without any work-based retirement savings program.
In January 2014 Senator Harkin introduced his USA Retirement Funds Act. That proposal generally provides for automatic participation (default in/option out) of employees not covered under a current defined benefit plan or defined contribution plan (with automatic enrollment at minimum levels) in a new USA Retirement Funds system – a system of collective trusts providing (generally) a DC-type benefit payable as an annuity at retirement.
Less comprehensive solutions to this problem were also proposed in 2014. The Administration unveiled a new auto-IRA initiative, the “myRA.” And, in a speech in May, Senator Marco Rubio (R-FL) proposed “giv[ing] Americans who do not have access to an employer sponsored plan the option of enrolling in the federal Thrift Savings Plan.” Finally, several states are considering adopting legislation that would require private (that is, non-governmental) employers that do not provide a retirement plan for their employees to adopt some sort of retirement program – typically, an ‘auto-IRA.’
In February 2014, Congressman Dave Camp (R-MI), Chairman of the House Ways and Means Committee, released a “discussion draft” of a Tax Reform Act of 2014, a comprehensive revision of the Tax Code.
Congressman Camp’s proposal contained several provisions that would directly affect retirement savings, including:
Reducing the dollar limit on ‘pre-tax’ 401(k) contributions by one-half. Thus, based on 2014 limits, under the proposal the limit on pre-tax contributions would be $8,750 (one half of $17,500), and the catch-up contribution limit would be $2,750 (one half of $5,500). Current limits would remain in place for the combination of pre-tax and ‘Roth’ contributions – an employee could still make the maximum 401(k) contribution but half of that contribution would have to be made on a Roth basis.
Requiring 401(k) plan sponsors would to include a Roth contribution option in the plan (there would be an exception for certain small employer plans).
Freezing the inflation adjustment to the dollar limits on qualified plan contributions and benefits for the period 2015-2023.
In addition, for taxpayers with income over certain dollar thresholds there would be a tax (including, for some high income taxpayers, a 10% surcharge) on pre-tax contributions to defined contribution plans. This proposal is similar to the Administration’s proposal, again included in its 2015 budget, to cap deductions for certain tax preferences, including DC contributions.
With respect to the consideration of increasing incentives for Roth 401(k) contributions, we published an article on “Roth tax benefit math,” discussing the relative value of Roth tax benefits in different scenarios and describing Congress’s Roth budget math.
There was little support for Congressman Camp’s tax reform proposal even among Republicans. But individual elements of it could be included in future, more popular proposals or as ‘revenue raisers’ to fund non-retirement savings policy proposals.
Finally, we note the following DC-related policy developments:
IRS released a revenue ruling clarifying the process by which a qualified plan determines that an incoming rollover may be accepted.
The Securities and Exchange Commission adopted amendments to the rules that govern money market mutual funds.
The Department of Labor released a request for information concerning brokerage windows in 401(k) plans.
IRS released Notice 2014-66, providing guidance with to respect a program under which deferred annuities are included as “fixed income” investments in a target date fund.
The ERISA Advisory Council presented its recommendations on two retirement issues it studied in 2014: Facilitating Lifetime Plan Participation and Outsourcing Employee Benefit Plan Services. (We discussed DC outsourcing in detail in our article Outsourcing of defined contribution plan fiduciary function.)
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Most of the issues we’ve discussed will remain under active consideration in 2014, and we will continue to follow them.