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In this article, we discuss: the final IRS rules for hybrid plans not in compliance with the market rate of return standard – those rules also postpone the effective date of 2014 hybrid rules to 2017; the recent decision in Pfeil v. State Street, a stock drop case; ERISA Advisory Council recommendations with respect to pension risk transfers; and the possible inclusion in omnibus spending legislation of a provision de-funding the Department of Labor’s fiduciary proposal.
In September 2014, IRS finalized regulations on the ‘market rate of return’ standard for cash balance plans and certain other hybrid plan issues. Those rules were generally effective for plan years beginning in 2016. At the same time, it proposed rules for transitioning to the new market rate of return standard for non-compliant plans. On November 13, 2015, IRS issued final transition rules. The new (2015) regulation on transition rules for non-compliant plans is effective for plan years beginning in 2017. It also generally pushes the effective date of the 2014 final regulations back one year, to 2017.
Thus, as a general matter, compliance with the market rate of return (and other) requirements of the 2014 hybrid regulations has been pushed back to 2017. There are, however, certain permissive rules under the 2014 regulations that sponsors may want to consider adopting prior to 2017. In addition, the regulations – both the basic rules published in 2014 and the transition rules just published – are highly technical. Sponsors will want to review with their advisors whether there remain any issues which should be addressed before 2017.
On November 10, 2015, the Sixth Circuit Court of Appeals decided Pfeil v. State Street, a stock drop case. The case involved a General Motors plan that included a Common Stock Fund that enabled participants to (voluntarily) invest in GM stock. The facts are typical ‘stock drop’ case facts: plaintiffs invested in GM stock via the plan; in 2008 and early 2009, GM stock declined significantly in value; the plan fiduciary suspended purchases of GM stock in November 2008 and then divested GM stock held in the fund in March 2009. Plaintiffs sued the plan fiduciary alleging a breach of ERISA’s prudence standard.
The case is a little unusual because the plan fiduciary was State Street Bank and Trust and not a committee made up of sponsor officials. State Street functioned, in effect, as an ‘outside fiduciary’ managing one fund, the plan’s company stock fund.
This was the second time the Sixth Circuit considered the case. Initially, the lower court dismissed plaintiffs’ claim based on a “presumption of prudence” analysis; plaintiffs appealed, and the Sixth Circuit reversed and remanded, holding that the presumption of prudence standard should not have been applied at the “motion to dismiss” stage. Then the district court, again using a presumption of prudence analysis, granted defendant’s motion for summary judgment.
After the Sixth Circuit’s first decision in Pfeil, the Supreme Court decided Dudenhoefer v. Fifth Third Bancorp, in which it rejected the presumption of prudence analysis in favor of, generally, a “market price” analysis. We discuss these issues in detail in our article Fifth Third Bancorp et al. v. Dudenhoeffer decided by Supreme Court.
In its second (November 2015) decision in Pfeil, the Sixth Circuit, applying the new Fifth Third standard, held for the defendant, focusing on the “the prudent process in which State Street engaged” in considering plan investments in GM stock.
As we have discussed (see, e.g., our article Update on Company Stock in Retirement Plans), post-Fifth Third, some plaintiffs have managed to survive a motion to dismiss by alleging that a plan fiduciary made up of company officials had inside information that should have led them to take some action – at a minimum, suspend purchases – with respect to company stock. Where, as in the GM case, an outside fiduciary is used, making such an allegation is much more difficult.
Where all that is involved is public information, the line the Supreme Court drew in Fifth Third is very bright:
[W]here a stock is publicly traded, allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or undervaluing the stock are implausible as a general rule, at least in the absence of special circumstances.
Thus, post-Fifth Third, as Pfeil v. State Street illustrates, the case for outsourcing fiduciary management of a company stock fund may have been strengthened.
The ERISA Advisory Council has released a summary of its 2015 recommendations. The DOL had asked the EAC to follow up on two issues from prior years: (1) Model Notices and Plan Sponsor Education on Lifetime Plan Participation; and (2) Model Notices and Disclosures for Pension Risk Transfers.
With respect to pension risk transfers, the EAC proposed, for use by plan sponsors, model Insurance Company Risk Transfer and Lump Sum notices and recommended that DOL issue them “as soon as administratively feasible.” The model Insurance Company Risk Transfer notice provides, in effect, ‘safe harbor’ language for communications to participants whose defined benefit plan benefits are being transferred to an insurance company. It includes FAQs on, e.g., the issues of insurance company solvency and state guaranty fund protections.
The model Lump Sum notice provides safe harbor language for communications to participants who are being given a choice between keeping an annuity benefit or taking a lump sum. It addresses common questions in a tabular format, comparing the outcomes under an annuity vs. a lump sum, e.g., where the participant “lives longer than expected” or the participant’s “company is not able to meet its pension promise.” It also includes some rule-of-thumb answers to the question “Which [annuity or lump sum] might be better for me?” Finally, it includes more detailed information about these issues, including in some cases links to additional resources.
We are providing a separate article on the EAC’s lifetime plan participation recommendations.
Facing a December 11, 2015 deadline, Congress is currently working on legislation necessary to fund the government, likely to be consolidated into an “omnibus” spending bill. Funding legislation reported out of House and Senate Committees with jurisdiction over DOL included provisions de-funding DOL’s fiduciary proposal. Here is the language from the House bill:
None of the funds made available by this Act may be used to finalize, implement, administer, or enforce the proposed Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment Advice regulation published by the Department of Labor in the Federal Register on April 20, 2015.
The DOL fiduciary proposal is only one on a list of Administration initiatives that the Republican-controlled Congress would like to de-fund. Whether it makes it into final legislation will depend on Republicans’ and the Administration’s view of its priority.
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We will continue to follow these issues.