DOL Can’t Put Fiduciary Duty on IRAs, Ex-Labor Official Testifies

Link: https://www.thinkadvisor.com/2024/01/10/dol-cant-put-fiduciary-duty-on-iras-ex-labor-official-testifies/

Excerpt:

The Labor Department lacks the legal authority to promulgate its new fiduciary rule, Brad Campbell, partner at Faegre Drinker, and former head of Labor’s Employee Benefits Security Administration, told House lawmakers Wednesday.

During testimony before the House Financial Services Capital Markets Subcommittee, Campbell maintained that the department “doesn’t have the legal authority to do what it is trying to do” because it cannot impose a fiduciary duty as it relates to individual retirement accounts.

“The reason we are here today is that the Proposals go well beyond DOL’s limited authority,” Campbell told lawmakers.

Labor’s plan ”would make DOL the primary financial regulator of $26 trillion, approximately half of which is held by individuals” in IRAs rather than employer-provided plans.

If Labor’s proposals “were limited to redefining fiduciary advice within the department’s actual authority — which is to administer the fiduciary standard expressly created by Congress to regulate employee benefit plans sponsored by private sector employers under Title I of ERISA — we wouldn’t be here today,” Campbell opined.

Author(s): Melanie Waddell

Publication Date: 10 Jan 2024

Publication Site: Think Advisor

DOL Inspector General Says EBSA Lacks Resources to Audit Pensions

Link: https://burypensions.wordpress.com/2023/12/06/dol-inspector-general-says-ebsa-lacks-resources-to-audit-pensions/

Excerpt:

planadvisor.com reports:

Department of Labor Inspector General Larry Turner issued a semi-annual report Tuesday arguing that the Employee Benefit Security Administration lacks both the resources and authority to fulfill its mandate to employee benefit plans. The report particularly emphasized EBSA’s limited authority to conduct thorough audits of workplace retirement plans.

My takeaways from the report:

The OIG remains concerned about the Employee Benefits Security Administration’s (EBSA) ability to protect the integrity of pension, health, and other benefit plans of about 153 million workers, retirees, and their families under the Employee Retirement Income Security Act of 1974 (ERISA). In particular, the OIG is concerned about the statutory limitations on EBSA’s oversight authority and inadequate resources to conduct compliance and enforcement. A decades-long challenge to EBSA’s compliance program, ERISA provisions allow billions of dollars in pension assets to escape full audit scrutiny. The act generally requires every employee benefit plan with more than 100 participants to obtain an audit of the plan’s financial statements each year. However, an exemption in the law allowed auditors to perform “limited-scope audits.” These audits excluded pension plan assets already certified by certain banks or insurance carriers and provided little to no confirmation regarding the actual existence or value of the assets. (page 23)

Author(s): John Bury

Publication Date: 6 Dec 2023

Publication Site: burypensions

Fiduciary principles need to be reaffirmed and strengthened in public pension plans

Link: https://reason.org/policy-brief/fiduciary-principles-need-to-be-reaffirmed-strengthened-public-pension-plans/

Executive Summary:

Fiduciaries are people responsible for managing money on behalf of others. The fundamental fiduciary duty of loyalty evolved over centuries, and in the context of pension plans sponsored by state and local governments (“public pension plans”) requires investing solely in plan members’ and taxpayers’ best interests for the exclusive purpose of providing pension benefits and defraying reasonable expenses. This duty is based on the notion that investing and spending money on behalf of others comes with a responsibility to act with an undivided loyalty to those for whom the money was set aside.

But the approximately $4 trillion in the trusts of public pension plans may tempt public officials and others who wish to promote—or, alternatively, punish those who promote— high-profile causes. For example, in recent years, government officials in both California and Texas, political polar opposites, have acted to undermine the fiduciary principle of loyalty. California Gov. Gavin Newsom’s Executive Order N-19-19 describes its goal “to leverage the pension portfolio to advance climate leadership,” and a 2021 Texas law prohibits investing with companies that “boycott” energy companies to send “a strong message to both Washington and Wall Street that if you boycott Texas Energy, then Texas will boycott you.” Both actions and others like them, attempt to use pension assets for purposes other than to provide pension benefits, violating the fundamental fiduciary principle of loyalty.

The misuse of pension money in the public and private sectors has a long history. The Employee Retirement Income Security Act (ERISA), signed into law by President Gerald Ford in 1974, codified fiduciary principles for U.S. private sector retirement plans nearly 50 years ago and is used as a prototype for pension fiduciary rules in state law and elsewhere. Dueling sets of ERISA regulations issued within a two-year period during the Trump and Biden administrations consistently reinforced the principle of loyalty. State legislation and executive actions, however, have weakened and undermined it, even where it is codified elsewhere in state law.

Thirty million plan members rely on public pension funds for financial security in their old age. The promises to plan members represent an enormous financial obligation of the taxpayers in the states and municipalities that sponsor these plans. If investment returns fall short of a plan’s goals, then taxpayers and future employees will be obligated to make up the difference through higher contribution rates.

The exclusive purpose of pension funds is to provide pension benefits. Using pension funds to further nonfinancial goals is not consistent with that purpose, even if it happens to be a byproduct. This basic understanding has been lost in the recent politically polarized public debates around ESG investing—investing that takes into account environmental, social, and governance factors and not just financial considerations.

It is critically important that fiduciary principles be reaffirmed and strengthened in public pension plans. The potential cost of not doing so to taxpayers, who are ultimately responsible for making good on public pension promises, runs into trillions of dollars. Getting on track will likely require a combination of ensuring the qualifications of plan fiduciaries responsible for investing, holding fiduciaries accountable for acting in accordance with fiduciary principles, limiting the ability of nonfiduciaries to undermine and interfere with fiduciaries, and separating the fiduciary function of investment management from settlor functions like setting funding policy and determining benefit levels.

Author(s): Larry Pollack

Publication Date: 11 May 2023

Publication Site: Reason

EBSA Secretary Defends ESG Rule as Legislative, Litigation Battles Continue

Link: https://www.ai-cio.com/news/ebsa-secretary-defends-esg-rule-as-legislative-litigation-battles-continue/

Graphic:

Excerpt:

The Department of Labor’s assistant secretary of labor for employee benefits security, Lisa Gomez, defended the DOL’s final rule allowing the consideration of ESG factors in retirement plan investments at a webinar hosted Monday by Ceres, a sustainability advocate.

The rule, which took effect on January 30, permits, but does not require, the use of ESG considerations in investment selection by retirement plan fiduciaries. There is a pending lawsuit in Texas challenging the legality of the rule.

Gomez explained that this rule is “not a per se requirement” to use ESG and clarifies that ESG factors may be considered as part of a fiduciary’s ordinary risk-return analysis. She also explained that this new rule does not allow fiduciaries to sacrifice the financial health of a plan to pursue other goals: A fiduciary may consider the risks and opportunities of climate change and other ESG factors.

Gomez dubbed the rule “a return to neutrality.”

According to Gomez, the previous rule, passed during the administration of President Donald Trump, which required only “pecuniary factors” to be used in investment selection, had a “chilling effect” on the consideration of ESG factors. Gomez said the word “pecuniary” neither appears in the text of the Employee Retirement Income Security Act, the governing statute for both rules, nor does it occupy a “long-standing place in employee benefits law.”

Gomez briefly discussed one of the more nebulous provisions of the new rule when she said participant preferences for investments can be considered in menu selection on the grounds that it can increase plan participation and deferral rates, thereby increasing retirement security. She did not comment on how fiduciaries should determine adequate participant interest or how much economic gain could be compromised in exchange for increased participation, if any.

Eric Pitt, a climate finance consultant at Ceres who moderated the webinar, asked Gomez how a fiduciary should consider a hypothetical ESG large-cap stock fund for a plan menu: Should the fiduciary compare it to other similar ESG funds or the entire universe of large-cap funds? Gomez answered that there is no special treatment for ESG funds, and a fiduciary should look generally at the risk and return for any and all large-cap equity funds available, whether they use ESG considerations or not.

Despite the branding of the rule as neutral, Republicans in Congress have increased their organized opposition to the use of ESG considerations in retirement-plan investing.

Representative Patrick McHenry, R-North Carolina, chairman of the House Financial Services Committee, announced the creation of a “Republican ESG working group” on Friday. The purpose of the working group is to “combat the threat to our capital markets posed by those on the far-left pushing environmental, social, and governance (ESG) proposals.”

Author(s): Paul Mullholland

Publication Date: 6 Feb 2023

Publication Site: ai-CIO

Stable Fund Focus in Another Excessive Fee Suit

Link: https://www.napa-net.org/news-info/daily-news/stable-fund-focus-another-excessive-fee-suit#.Y0F5DNPIdlA.linkedin

Excerpt:

The latest excessive fee suit targets “wildly excessive compensation,” an allegedly imprudent stable value offering, and the unmonitored use of “float” income. 

More specifically, the participant-plaintiffs of Miami, Florida-based Lennar Corp. are raising issues with the recordkeeping/administrative fees (“wildly excessive compensation”) paid by the plan, the prudence of retaining Prudential’s stable value fund, and the use of float income by Prudential (the plan’s recordkeeper). 

The lawsuit, filed in the U.S. District Court for the Southern District of Florida (Catenac v. Lennar Corp., S.D. Fla., No. 1:22-cv-23232, complaint 10/5/22), is directed at a plan with approximately $1.2 billion in assets and nearly 13,000 participants. The participant-plaintiffs are represented here by Morgan & Morgan PA.   

Author(s): Nevin E. Adams, JD

Publication Date: 6 Oct 2022

Publication Site: NAPA-net

How Much Is ‘Enough’?

Link:https://www.asppa-net.org/news/how-much-%E2%80%98enough%E2%80%99

Excerpt:

Looks like those hoping for some clarity on a threshold issue involving ERISA fee litigation will have to wait for another day.

I’m referring, of course, to last week’s ruling by the Supreme Court on the case of Hughes v. Northwestern University et al.—a case that the law firm of Schlichter Bogard & Denton—which seems to have “invented” this class of excessive fee litigation—said was having a “chilling effect” on this type of lawsuit, more precisely their ability to proceed to trial (or settlement). Consequently, ERISA fiduciaries were waiting anxiously for a ruling on the case, which involved allegations that Northwestern University had failed to comply with its fiduciary responsibilities with regard to the options available to plan participants. 

Indeed, the allegations in this case weren’t all that different from the litany transgressions outlined in any number of such cases over the years—but in making their case to be heard by the nation’s highest court the plaintiffs’ attorneys (the aforementioned law firm)—had noted (complained?) that suits “with virtually identical” claims were being dismissed out of hand, while other courts were allowing them to go to trial. This they claimed was “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather “a legal disagreement about where that hurdle should be set.” 

….

Consequently. some clarity as to how, and how much, must be established by those who file the suits before they get to take the issue(s) to trial is timely, to say the least. Or, said another way, how much is “enough.” 

….

Rather, the court had merely determined that there were some prudent alternatives on the menu, and that the participants could choose them if they had an issue with those that (allegedly) weren’t as expensive and that, for that district court, was enough.

Author(s): Nevin E Adams, JD

Publication Date: 3 Feb 2022

Publication Site: ASPPA

Pension Plan Actuarial Assumption Litigation: The End is Not Yet in Sight

Link:https://www.jdsupra.com/legalnews/pension-plan-actuarial-assumption-5162449/

Excerpt:

One recent line of ERISA litigation involves the actuarial equivalence factors used by defined benefit pension plans.  The lawsuits apply both to active defined benefit pension plans and pension plans that have been “frozen” as to future benefit accruals.

….

Basically, the lawsuits allege that the plan, through the use of out-of-date and “unreasonable” actuarial assumptions and conversion factors, has “overcharged” participants when converting from the Life Annuity Benefit to payment in an alternate payment form. 

….

In many of the cases, the challenge focuses on allegedly outdated mortality tables that do not take improved life expectancy into account.  In some situations, the actuarial factors (including mortality table assumption) were established decades ago and have never been updated.  In essence, the lawsuits allege that the plan (by not using updated factors and tables) is not paying out the full value of the participant’s benefit when the participant has elected payment in an alternate payment form.

Author(s): Gregg Dooge

Publication Date: 20 Jan 2022

Publication Site: JD Supra

Your New Woke 401(k)

Link:https://www.wsj.com/articles/your-new-woke-401-k-retirement-savings-esg-erisa-biden-administration-department-of-labor-proposal-11634753095

Excerpt:

While Democrats in Congress negotiate over trillions of dollars in new spending, the Biden Administration is quietly advancing its agenda through regulation. Witness a little-noticed proposed rule last week by the Labor Department that will add new political directives to your retirement savings.

The Administration says the rule will make it easier for retirement plans to offer 401(k) funds focused on ESG (environmental, social and governance) objectives. In fact, the rule will coerce workers and businesses into supporting progressive policies.

An important Trump Labor rule last fall reinforced that the Employee Retirement Income Security Act (Erisa) requires retirement plan fiduciaries to act “solely in the interest” of participants. The rule prevented pension plans and asset managers from considering ESG factors like climate, workforce diversity and political donations unless they had a “material effect on the return and risk of an investment.”

The Biden DOL plans to scrap the Trump rule while putting retirement sponsors and asset managers on notice that they have a fiduciary duty to include ESG in investment decisions. The proposed rule “makes clear that climate change and other ESG factors are often material” and thus in many instances should be considered “in the assessment of investment risks and returns.”

Author(s): WSJ editorial board

Publication Date: 20 Oct 2021

Publication Site: WSJ

Your State Pension Is Not Fully Protected Under Law

Link: https://www.forbes.com/sites/edwardsiedle/2021/09/08/your-state-pension-is-not-fully-protected-under-law/

Excerpt:

State and local government pensions assure workers and retirees that they enjoy the same protections as the comprehensive federal law, ERISA provides to corporate participants. That’s simply not true. Don’t count on state law to protect your retirement security.

It has been said that the Law is a blunt instrument, incapable of dealing with all shades and circumstances, with little or no regard for individual situations.

…..

Even where the most comprehensive legal and regulatory framework exists and answers are crystal-clear, your pension is at risk because enforcement or policing of the law is lacking. I have taught U.S. Department of Labor pension investigators. As trained and committed as they are, they’re hopelessly out-gunned by the investment industry. Wall Street runs circles around regulators charged with enforcing pension laws.

However, the vast majority of pensions are not subject to any comprehensive law.   

For example, as hard as it is to believe, explain or justify, the approximately $4 trillion in America’s government pensions is not protected by any comprehensive federal or state law.

Author(s): Edward Siedle

Publication Date: 8 September 2021

Publication Site: Forbes

U.S. Supreme Court to Hear University Pension Case

Link: https://www.insidehighered.com/quicktakes/2021/07/06/us-supreme-court-hear-university-pension-case

Excerpt:

The U.S. Supreme Court on Friday agreed to consider the appeal of Northwestern University employees who say the university mismanaged their 403(b) pension investments. The lawsuit against Northwestern was one of roughly 20 filed in 2016 charging that wealthy and prestigious universities failed to fulfill their fiduciary duty by charging unreasonable fees and offering too many investment options.

Lower federal courts sided with Northwestern in dismissing the employees’ claims, but in their appeal to the Supreme Court, lawyers for the plaintiffs argued that the federal appeals courts had issued divided rulings on key questions in similar lawsuits.

Author(s): Doug Lederman

Publication Date: 6 July 2021

Publication Site: Inside Higher Ed

About That Pension Check… A Miscalculation Case With Broader Implications

Link: https://www.natlawreview.com/article/about-pension-check-miscalculation-case-broader-implications

Excerpt:

The Ninth Circuit Court of Appeals recently addressed several issues of first impression in Bafford v. Northrop Grumman (9th Cir. April 15, 2021), a lawsuit involving retirees who received vastly overstated pension benefit estimates from the plan’s recordkeeper reminds employers of the importance of careful administration.   The case highlights the need to ensure that electronic recordkeeping systems and tools align with the plan terms.  Participant requests for plan or benefit information using online portals or other electronic means still demand timely and accurate responses as required by ERISA’s disclosure requirements.

…..

On appeal from the district court, the Ninth Circuit agreed that the participants’ ERISA fiduciary claims should have been dismissed, aligning with the First and the Fourth Circuit’s view that a named fiduciary is only liable for a fiduciary breach if they are performing a fiduciary function.  The court said that calculating pension benefits using a pre-set formula is a ministerial function, not a fiduciary function.  So a miscalculation error would not create a breach of fiduciary duty claim.

Author(s): Craig A. Day, Suzanne G. Odom

Publication Date: 25 April 2021

Publication Site: The National Law Review

$59 Million Settlement in Pension Plan Outdated Actuarial Assumption Litigation

Link: https://www.natlawreview.com/article/59-million-settlement-pension-plan-outdated-actuarial-assumption-litigation

Excerpt:

A dramatic, recent example of this dilemma occurred in a Massachusetts district court proceeding, when an employer agreed to a $59.17 million settlement in a proposed ERISA class action accusing it of using outdated mortality rates to calculate pensions. Cruz v. Raytheon Co., Mass. Dist. case number 1:19-CV-11425-PBS, Feb. 16, 2021.

The employer had argued in its motion to dismiss that the retirees failed to make the case that the plan violated ERISA by unreasonably using a mortality table created in 1971 and a 7% interest rate to calculate retirees’ alternative annuity benefits it said would be “actuarially equivalent” to the plan’s benefits. The employer argued that its conversion factors for determining the alternative annuity benefits were reasonable and that the retirees were attempting to force their own arbitrary actuarial assumptions. The employer further asserted that under ERISA, employers sponsoring pension plans have wide discretion in determining which actuarial assumptions or conversion factors can be used, requiring only that the single life annuity (SLA) normal form of benefit is equivalent by actuarial standards.

Author(s): Jeffrey D. Mamorsky, Richard A. Sirus, Greenberg Traurig, LLP

Publication Date: 16 March 2021

Publication Site: National Law Review