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In this retirement savings outlook we review challenges to the Department of Labor’s Conflict of Interest rule, the status of IRS’s review and adoption of new mortality tables, bipartisan legislation recently introduced to remove PBGC premiums from the Congressional budget, and recent plan reformation litigation.
In Congress: The House and Senate have passed a joint resolution under the Congressional Review Act overturning DOL’s recently finalized Conflict of Interest rule:
Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Congress disapproves the rule submitted by the Department of Labor relating to “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule – Retirement Investment Advice”…, and such rule shall have no force or effect.
President Obama is expected to veto this legislation.
In court: On June 1, 2016, a group of plaintiffs, including the Chamber Of Commerce of the United States of America, the Financial Services Institute, Inc., the Financial Services Roundtable, and the Insured Retirement Institute, filed suit in the United States District Court for the Northern District of Texas challenging the Conflict of Interest rule. The plaintiffs claim, among other things, that:
In adopting the rule, DOL “improperly exceeded its authority in violation of ERISA, the Internal revenue Code, and the Administrative Procedure Act.”
The rule “violates the Administrative Procedure Act because it is arbitrary, capricious, and irreconcilable with the language of ERISA and the Internal revenue Code.”
DOL “misused its exemptive authority to create a private right of action and regulate IRAs and the broker-dealers who offer them.”
DOL “failed to provide adequate notice and to sufficiently consider and respond to comments and arbitrarily and capriciously assessed the rule’s benefits, consequences, and costs.”
“The Best Interest Contract Exemption impermissibly burdens speech in violation of the first amendment.”
At the end of 2014 the Society of Actuaries finalized new mortality tables for private DB plans, and many sponsors have already adopted new tables for purposes of financial disclosure. The IRS is currently at work on guidance that will require DB plan sponsors to adopt new tables for purposes of funding and the calculation of lump sum payments. That work has to some extent been delayed by October 2015 debt ceiling legislation, which amended (and, generally, liberalized) the rules for use of substitute mortality tables based on, e.g., actual experience.
Thus, while many believed that new tables would apply beginning in 2017, there now appears to be a possibility that application will be delayed to 2018. Such a delay would be significant for, among other things, decisions about the timing of derisking.
In April 2016, a bipartisan group in Congress introduced the Pension and Budget Integrity Act of 2016, which proposes to take PBGC premiums out of the budget. Quoting the bill’s findings clause:
The revenues from PBGC premiums are deposited into the revolving funds of the PBGC and are credited to the operating budget of the PBGC, cannot be used for any purpose other than PBGC expenses, and are counted as revenue to the United States Treasury and used to offset unrelated Federal spending. Sound budget policy dictates that crediting PBGC premium revenues to the revolving funds of the PBGC and as receipts to the United States Treasury constitutes double-counting; double-counting revenue is inconsistent with sound budgetary policy and good governance.
In the last several years, Congress has repeatedly raised PBGC premiums, generally as a way to solve budget problems created by spending in areas unrelated to retirement savings (e.g., in last year’s October debt limit legislation). This proposal to remove PBGC premium revenues from the Congressional budget is an indication that at least some in Congress are getting uncomfortable with that policy/budget dynamic. Indeed, the Administration’s 2017 budget stated that “additional increases in single-employer premiums are unwise at this time and would unnecessarily create further disincentives to maintaining defined benefit pension plans.”
A couple of cases are working their way through the courts in which plaintiffs are seeking plan reformation as a remedy for alleged misrepresentations by plan fiduciaries. Reformation can be an extreme remedy. In effect, it changes the terms of the plan. Depending on the change and how many participants are affected, the cost can be very high.
In the first case, Osberg v. Footlocker, the United States District Court Southern District of New York held (in a September 2015 decision) that, in the context of a cash balance conversion, plan fiduciaries committed “equitable fraud” in failing to disclose the effect of wear-away on participants’ benefits.
To obtain relief (in the form of a reformation of the plan) the court held that the plaintiffs must show: “(1) violations of ERISA §§ 404(a) [which includes ERISA’s duty of loyalty] and 102(a) [ERISA’s summary plan description requirement], based on the preponderance of the evidence; (2a) mistake or ignorance by employees of ‘the truth about their retirement benefits,’ based on clear and convincing evidence; and (2b) ‘fraud or similar inequitable conduct’ by the plan fiduciaries, based on clear and convincing evidence.”
A critical issue in these cases is whether plaintiffs must show “detrimental reliance.” The Eighth Circuit has defined detrimental reliance as meaning: “that the plaintiff took action, resulting in some detriment, that he would not have taken had he known that the terms of the plan were otherwise or that he failed, to his detriment, to take action that he would have taken had he known that the terms of the plans were otherwise.”
A controversial element of the district court’s decision in Footlocker was its holding that “proof of class-wide misrepresentation does not require proof of individualized reliance.” Explaining this holding, the court said:
The Court credits plaintiff’s strong evidence of generalized reliance. No Participant would have ignored the fact that their benefits were frozen without their knowledge. Indeed, Foot Locker admitted at trial that the very purpose of keeping wear-away a secret was to avoid negative publicity, loss of morale, and inability to hire and retain employees. The Court further credits Class members’ testimony that they read the Plan change announcements and believed that their benefits were growing, and that credits—including compensation credits based on their service—were contributing to that growth. Indeed, the fact that Foot Locker issued annual individualized account statements portraying the same picture is strong evidence that Participants were expected to use the growing account balance as an indication that their continued service yielded growing benefits.
This case is currently on appeal to the Second Circuit Court of Appeals.
The second case, Moyle v. Liberty Mutual Retirement Benefit Plan, involves alleged misrepresentations about the extent to which the Liberty Mutual pension plan would recognize past service credit. In a May 20, 2016 decision, the Ninth Circuit Court of Appeals reversed a decision by the district court dismissing plaintiffs claim that they were, on the basis of such misrepresentations, entitled to relief in the form a plan reformation under ERISA’s catchall liability section. With that decision, plaintiffs will now be able to move forward with that claim.
Roughly understood, these reformation cases represent the creation of a right to sue for benefits based on what is said in an SPD or other employer communication, where the plan itself does not provide for those benefits. Highlighting what is at stake for sponsors, an amicus brief to the Second Circuit (on behalf of The American Benefits Council, the ERISA Industry Committee, and the Chamber of Commerce of the United States of America) in the Osberg case argues that the district court’s decision not to require individual proof of detrimental reliance “would … [render] ERISA plan administrators guarantors of accuracy even if a communication error has no harmful consequence.”
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We will continue to follow these issues.