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In this article we review some of the significant 2018 retirement policy developments in legislation, regulation and litigation.
If the 116th Congress takes up retirement policy, some (perhaps, many) of the bipartisan proposals that were considered by the current (115th) Congress will be on the table. The following is an inventory of some of the more important of those proposals:
DC annuity fiduciary safe harbor: Current Department of Labor rules require that, where a DC plan offers an in-plan annuity, plan fiduciaries must conclude that “at the time of the selection, the annuity provider is financially able to make all future payments under the annuity contract.” Both the Senate’s Retirement Enhancement and Savings Act (RESA) and House tax legislation include proposals addressing this issue, generally by deferring to state insurance regulation on the issue of the financial condition of the annuity carrier.
Closed group relief: To address the nondiscrimination problems presented by “closed groups” (e.g., a limited group of participants who get grandfathered benefits under a DB plan or make-whole benefits under a DC plan), there are proposals (e.g.,RESA and House tax legislation) that would allow DB plans to be aggregated with DC plans and tested on a benefit accruals basis, without having to satisfy (burdensome) threshold conditions (sometimes referred to as gateways) if certain conditions are met. We note that on August 24, 2018, IRS published Notice 2018-69, extending through 2019 temporary relief from Internal Revenue Code nondiscrimination rules for closed groups.
Authorization of DC Open MEPs: There are proposals (e.g., RESA and House tax legislation) that would authorize “Pooled Plan Providers” to offer defined contribution plan “Open” multiple employer plans (MEPs) by eliminating the current DOL “nexus” rule and providing a solution to IRS’s “one bad apple” rule for qualifying plans, subject to certain conditions. Other Open MEP proposals include a limited exemption from ERISA fiduciary rules for certain small employers.
Mandatory lifetime income disclosure: RESA includes a proposal that would require DC plan administrators to annually provide participants a description of the monthly “income stream” they would receive if their account balance were paid in the form of a single life annuity and joint and surviving spouse annuity, based on assumptions specified in DOL guidance. Many industry organizations have raised concerns about this proposal.
Electronic participant disclosure: At the end of 2017, a bipartisan group of Representatives introduced the Receiving Electronic Statements to Improve Retiree Earnings Act (discussed in our June 2018 Legislative update), under which any document required or permitted to be furnished to a participant under ERISA could be provided in electronic form provided certain requirements (including a participant right to ask for paper disclosure) are met. This legislation would significantly relax DOL electronic disclosure rules, which currently generally require an affirmative participant election. President Trump’s Executive Order on Strengthening Retirement Security in America also highlighted this issue.
Proposals to expand coverage and increase savings: There are proposals (e.g., in draft Portman-Cardin legislation) to: (1) create a new 401(k) actual deferral percentage (ADP) testing auto-enrollment/escalation safe harbor, based on increased default/escalation rates and provide a (limited) tax credit for small employers with respect to matching contributions; (2) increase the small plan startup credit; (3) create a new small employer re-enrollment credit; (4) expand the Saver’s Credit; and (5) allow long-term part-time employees to participate in 401(k) plans.
Student loan repayments treated as elective deferrals for purposes of matching contributions: There is a proposal (draft Portman-Cardin legislation) that would generally allow a plan to treat a student loan repayment (subject to certain limits) as “match-able” pursuant to rules similar to those applicable to “regular” 401(k) employee contributions (aka “elective deferrals”). The loan repayment itself, however, would not be considered an employee contribution (e.g., for purposes of ADP testing). Related to this issue, on August 18, 2018, the Internal Revenue Service released Private Letter Ruling (PLR) 201833012, concluding that a 401(k) plan that provided for “an employer nonelective contribution on behalf of an employee conditioned on that employee making student loan repayments” did not violate Internal Revenue Code section 401(k) prohibitions on conditioning a benefit on an employee making elective contributions.
Relaxing rules for the correction of inadvertent errors, expansion of EPCRS: There is a proposal (draft Portman-Cardin legislation) that would significantly reduce the difficulty of correcting errors by (1) simplifying the process of correcting automatic contribution errors, (2) instructing Treasury to significantly expand the ability of sponsors to self-correct inadvertent errors under theEmployee Plans Compliance Resolution System (EPCRS) and (3) allowing self-correction of certain required minimum distribution (RMD) errors without penalty. In connection with these changes, Treasury would be instructed to expand the safe harbor corrections available under the EPCRS with respect to inadvertent failures.
Increase the flexibility of the RMD rules: These proposals (included in draft Portman-Cardin legislation) include: (1) an increase in the mandatory distribution age; (2) an instruction to Treasury to eliminate the (current) limitation on qualified longevity annuity contracts (QLACs) to 25 percent of an individual’s account balance and to increase the dollar limit on QLACs from $125,000 to $200,000; (3) a provision that the RMD rules do not apply to participants with retirement plan balances of $100,000 or less (indexed and subject to a $10,000 “phase-out”); and (4) an instruction to Treasury to update the life expectancy tables used to calculate RMDs (President Trump’s Executive Order on Strengthening Retirement Security in America also highlighted this issue).
Missing participants: On February 28, 2018, Senators Warren (D-MA) and Daines (R-MT) introduced the Retirement Savings Lost and Found Act of 2018, providing (among other things, and in a significant revision to their 2016 proposal) meaningful guidance and relief for sponsors on the issue of missing participants. More generally (and oversimplifying), the legislation would establish a “Retirement Savings Lost and Found” that would maintain a database of participant benefits in ERISA retirement plans. The bill would also reform rules applicable to benefit cash-outs, including adding reporting requirements, restricting the investment funds into which the cash-out distribution could be made, and raising the cap on forced cash-outs from $5,000 to $6,000.
Neal proposals: With the Democrats taking control of the House of Representatives, Congressman Neal (D-MA) is set to become Chairman of the House Ways and Means Committee. At the end of 2017 he introduced two proposals, the substance of which is likely to be part of any 2019 retirement policy debate: the Automatic Retirement Plan Act of 2017, which would (with some very limited exceptions) require every US employer to maintain an “automatic contribution” retirement plan; and the Retirement Plan Simplification and Enhancement Act of 2017, which proposes a number of improvements to current rules, fixing some technical issues but also making some important substantive changes. Neither bill had any cosponsors.
Fiduciary rule: On March 15, 2018, in a 2-1 decision, a 3-judge panel of the Fifth Circuit Court of Appeals ruled for plaintiffs in Chamber Of Commerce of the United States of America, et al. v. United States Department of Labor, vacating in toto the Department of Labor’s Fiduciary Rule. The Department of Labor did not appeal this decision. To clarify certain issues raised by the decision, on May 7, 2018, DOL published Field Assistance Bulletin 2018-02, Temporary Enforcement Policy On Prohibited Transactions Rules Applicable To Investment Advice Fiduciaries, providing temporary relief for certain prohibited transactions that may result from the Fifth Circuit’s decision.
On April 18, 2018, the SEC, by a 4-1 vote, proposed (1) a “Regulation Best Interest” providing new conduct standards for broker-dealers, (2) an “Interpretation Regarding Standard of Conduct for Investment Advisers” and (3) a requirement that investment advisers and broker-dealers provide retail investors a “Relationship Summary.” SEC’s proposal addresses a number of the issues that were the subject of the DOL Fiduciary Rule. We posted two articles on this proposal, the first briefly reviewing the substance of SEC’s proposed broker regulation – “Regulation Best Interest,” and the second reviewing the SEC’s proposed Interpretation Regarding Standard of Conduct for Investment Advisers.
On April 23, 2018, DOL published FAB 2018-01 on economically targeted investments and proxy voting, stating (among other things) that, with respect to the Obama DOL’s prior guidance that “collateral goals” may be used as “tie-breakers,” “the Department merely recognized that there could be instances when otherwise collateral ESG [environmental, social and governance] issues present material business risk or opportunities to companies that company officers and directors need to manage as part of the company’s business plan and that qualified investment professionals would treat as economic considerations under generally accepted investment theories.”
Executive Order on Strengthening Retirement Security in America: On August 31, 2018, President Trump signed an Executive Order on Strengthening Retirement Security in America. The EO instructed the relevant agencies (DOL and IRS) to: “examine policies” that would eliminate ERISA regulatory obstacles to the creation of Open MEPs and regulations that would address the “one bad apple” Open MEP qualification issue; review notice and disclosure rules to make them more understandable while reducing the costs and burdens they impose; and examine the life expectancy and distribution period tables currently used to determine RMDs and determine whether they should be updated.
In response to the EO, on October 22, 2018, DOL released a proposed regulation clarifying (and in some regards expanding) rules for which groups may adopt multiemployer plans (MEPs) under ERISA. DOL did not, however, authorize Open MEPs, explaining that it “considered, but decided not to include [Open MEPs] … because they implicate different policy concerns.”
Mortality assumptions for minimum funding and PBGC premiums: In early October 2017, IRS finalized a regulation adopting mortality tables/assumptions based on (among other things) SOA mortality improvement scale MP-2016 for purposes of funding, the determination of Pension Benefit Guaranty Corporation variable-rate premiums and lump sum valuations. Those rates were generally effective beginning in 2018, although sponsors were, under certain conditions, permitted to defer adoption to 2019 for all purposes other than calculation of lump sums. In December, 2017, IRS issued Notice 2018-02, updating, for 2019, mortality improvement rates and static mortality tables to reflect SOA’s MP-2017 mortality improvement scale (which showed a year-over-year increase in the age-adjusted U.S. mortality rates of 1.2%). In October, 2018, the Society of Actuaries published its new Mortality Improvement Scale MP-2018, showing mortality improvement rates that are “slightly lower than the corresponding Scale MP-2017 rates.” IRS is, sometime in 2019, expected to take into account the new SOA MP-2018 scale and update mortality rates/tables for purposes of 2020 valuations.
RCH clearinghouse PTE and Advisory Opinion: On November 7, 2018, DOL published a Notice of Proposed Exemption Involving Retirement Clearinghouse, LLC (RCH), addressing a potential prohibited transaction issue (the “Transfer Fee” RCH charges with respect to transfers to a participant’s new plan) presented by RCH’s clearinghouse “locate, match, and transfer” model. DOL also provided RCH an advisory opinion clarifying the fiduciary status of the “old” plan sponsor, the “new” plan sponsor and RCH under the RCH program.
Hardship withdrawal guidance: The Bipartisan Budget Act of 2018, signed into law by President Trump on February 9, 2018, included several modifications to the 401(k) hardship withdrawal rules. On November 14, 2018, IRS proposed amendments to those rules, providing a new and more flexible hardship withdrawal “safe harbor” and expanding the amounts that may be withdrawn from a 401(k) plan in a hardship withdrawal.
401(k) fee litigation: The Ninth Circuit Court of Appeals has continued to side with defendant sponsor fiduciaries and providers in 401(k) fee litigation. On November 13, 2018, in an unpublished 3-page opinion, a three-judge panel of the Ninth Circuit upheld the dismissal of plaintiffs’ claims in the White v. Chevron 401(k) fee litigation. The court sided with defendants on one of the critical issues in current 401(k) fee litigation: whether a plaintiff may state a claim for breach of the ERISA duty of prudence merely by alleging that there was a less expensive, “identical” alternative to the service/fund provider selected by plan fiduciaries. In this regard the court stated:
Where there are “two possible explanations, only one of which can be true and only one of which results in liability, plaintiff[] cannot offer allegations that are ‘merely consistent with’ [its] favored explanation but are also consistent with the alternative explanation.” “Something more is needed, such as facts tending to exclude the possibility that the alternative explanation is true …” [Citations omitted.]
In Patterson v. The Capital Group, the United States District Court Central District of California reached a similar conclusion, finding that, among other things, a claim based only on an allegation that the fiduciaries included more expensive share classes in the plan fund menu, when there were less expensive share classes available, was insufficient to survive a motion to dismiss.
In 401(k) fee litigation against providers, on February 23, 2018, the Ninth Circuit found for defendant in Santomenno v. Transamerica, holding that Transamerica, as plan administrator, was not a fiduciary with respect to the negotiation or collection of its own fees. In reaching this decision, it explicitly stated that the reasonableness and prudence of plan fees are an issue for plan fiduciaries, not service providers. In Scott v. Aon Hewitt Financial Advisors, et al., on March 19, 2018, the District Court for the Northern District of Illinois dismissed plaintiff’s claims against Aon Hewitt and Aon Hewitt Financial Advisors alleging that investment advice arrangements between Hewitt, AFA and Financial Engines violated ERISA’s fiduciary and prohibited transaction rules.
Stock drop litigation: The United States District Court for the District of Minnesota dismissed, for a second time, claims by participants in the Wells Fargo 401(k) plan that plan fiduciaries violated ERISA’s fiduciary rules by “failing to disclose Wells Fargo’s unethical sales practices prior to September 2016.” This second decision focused on the issue of the fiduciary duty of loyalty, holding that a claim based on the mere existence of conflicting loyalties was insufficient to survive a motion to dismiss. The court cited cases holding that “the mere fact that a fiduciary had an adverse interest does not by itself state a claim for relief” and that “[p]ersons who serve as fiduciaries may also act in other capacities, even capacities that conflict with the individual’s fiduciary duties.”
In a legacy stock case, on May 9, 2018, the United States District Court for the Southern District of Texas, in Schweitzer v. The Investment Committee Of The Phillips 66 Savings Plan, held that: (1) shares of legacy stock held by the plan were not “employer securities” and thus were not exempt from ERISA’s diversification requirement; (2) ERISA’s diversification requirement was, however, met by the availability of alternative diversified investment options in the plan’s fund menu; and (3) applying a Fifth Third Bancorp et al. v. Dudenhoeffer “market price = prudence” analysis, ERISA’s prudence requirement was met with respect to the plan’s retention of the legacy stock as an investment option.
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We will continue to follow these issues.