News

"Most of the focus on ... decision from the Second Circuit ... will be on the pleading standard for prohibited transaction claims.... [T]he key lesson of the Cornell case, like the Yale trial, is that the best proof of a fiduciary process in an imprudence case is to show a pattern of investment and fee changes over a course of years." [Cunningham v. Cornell Univ., No. 21-0088 (2d Cir. Nov. 14, 2023)]

"Many record keepers have been able to reduce expenses and offer low cost share classes because they receive annual 'stipends' from asset managers willing to pay the entry fee. Should those fees be considered when determining whether their compensation is reasonable? ... Does the Bugielski precedent apply to the 'platform' fees paid to advisory firms by record keepers and assets managers? ... Do advisors disclose these payments?" [Bugielski v. AT&T Servs., Inc., No. 21-56196 (9th Cir. Nov. 8, 23)]

"[T]he Second Circuit held that in order to plead a prohibited transaction claim between a plan fiduciary and party in interest, a complaint must plausibly allege that the fiduciary caused the plan to engage in a transaction that constituted furnishing of services between the plan and party in interest, where that transaction was unnecessary or involved unreasonable compensation, thereby supporting an inference of disloyalty." [Cunningham v. Cornell Univ., No. 21-0088 (2d Cir. Nov. 14, 2023)]

"Decisions regarding ERISA prohibited transactions in cases heard in the 8th and 9th Circuits set different standards than the one set by the 2nd Circuit's decision, increasing the likelihood of the Supreme Court hearing an appeal to set nationwide precedent." [Cunningham v. Cornell Univ., No. 21-0088 (2d Cir. Nov. 14, 2023)]

"A $31 recordkeeping per-participant fee is well below the average and median for $1B+ asset plans. But plaintiff law firms continue to file fiduciary malpractice claims with intentionally false comparators ... The plan sponsor community must fight back against frivolous excess fee lawsuits by publishing studies of what large plans actually pay for recordkeeping services and explaining how these services are differentiated by quality and scope." [Winkelman v. Whole Foods Market, Inc., No. 23-1352 (W.D. Tex. complaint filed Nov. 6, 2023)]

"The fundamental flaw in the court's reasoning is that the court focuses on fees 'received' by Fidelity rather than on fees 'paid' by the Plan.... Plan fiduciaries will need to put in place a prudent process to identify and consider indirect compensation received by a service provider from sources other than the plan, in order to determine that the service provider is receiving no more than 'reasonable compensation'." [Bugielski v. AT&T Servs., Inc., No. 21-56196 (9th Cir. Nov. 8, 23)]

"The issue highlighted in Bugielski -- the obligation of sponsor fiduciaries to review the reasonableness of indirect third-party fees received by service providers -- is identical to a requirement in the recently proposed DOL investment advice fiduciary regulation that explicitly conditions the availability of PTE 2020-02 on the fiduciary adviser's compensation -- direct or indirect -- being reasonable." [Bugielski v. AT&T Servs., Inc., No. 21-56196 (9th Cir. Nov. 8, 23)]

"[T]he court explained, 'we hold as a matter of first impression that to state a claim for a prohibited transaction ... it is not enough to allege that a fiduciary caused the plan to compensate a service provider for its services; rather, the complaint must plausibly allege that the services were unnecessary or involved unreasonable compensation, thus supporting an inference of disloyalty.' " [Cunningham v. Cornell Univ., No. 21-0088 (2d Cir. Nov. 14, 2023)]

"During October, the estimated cost to transfer retiree pension risk to an insurer in a competitive bidding process increased from 101.1% of a plan's accounting liabilities (accumulated benefit obligation, or ABO) to 101.9% of those liabilities.... During the same period, the average annuity purchase cost across all insurers in our index rose 90 basis points, from 103.5% to 104.4%."

"Cornell University's recent victory in a lawsuit alleging retirement plan mismanagement added to the growing debate over whether routine contracts between employers and retirement plan service providers can be challenged under ERISA rules aimed at curbing conflicted and self-interested transactions.... The Second Circuit's opinion ... added to a widening circuit split over how easy it is to challenge these arrangements in court." [Cunningham v. Cornell Univ., No. 21-0088 (2d Cir. Nov. 14, 2023)]

"[Advisory Opinion 2023-01A] did not address the potential impact of [recent US Supreme Court decisions] ... which held that race-conscious admissions policies ... violate the Equal Protection Clause of the Fourteenth Amendment.... [In] early August 2023, the American Alliance for Equal Rights filed a race discrimination lawsuit ... [alleging that an] asset manager's grant program, which sought to support Black female business owners, violates Section 1981 [of the Civil Rights Act of 1866 (which prohibits discrimination in contracting)]." [American Alliance for Equal Rights v. Fearless Fund, No. 23-3424 (N.D. Ga. complaint filed Aug. 2, 2023; 11th Cir. No. 23-13138 injunction granted Sep. 30, 2023)]

"The activities involved a self-directed brokerage account (SDBA) the plan included as an investment option ... [T]he suit alleges that, in total, KSI has obtained payment in excess of $1.5 million from the Plan, charged as investment management fees related to Plan participants' [brokerage accounts]." [(United Airlines Inc. v. Keep Safe Investments LLC, No. 23-03426 (D. Minn. complaint filed Nov. 7, 2023)]

"The firms were ordered in August 2022 to pay [$1.5 million] because the district court judge said they 'recklessly proceeded to trial in violation of their duty to objectively analyze their case.'... The law firms represented plaintiffs in several sponsors' retirement plans against Empower ... saying allegedly excessive record-keeping fees and investment fees violated ERISA.... The sponsors were not defendants." [Obeslo v. Empower Capital Mgmt., Nos. 22-1291, 22-1292 (10th Cir. Oct. 31, 2023)]

"The innovation in this case is that the plaintiffs are claiming -- and the court agrees with them -- that because the plan-recordkeeper relationship is a per se prohibited transaction, it must comply with the exemption available for that specific prohibited transaction, which (among other things) requires that the recordkeeper's compensation, both direct and indirect, be 'reasonable.' And, in determining whether it is reasonable, plan fiduciaries must take into account/review the indirect compensation the recordkeeper is receiving from the participant advice provider." [Bugielski v. AT&T Servs., Inc., No. 21-56196 (9th Cir. Aug. 4, 2023; pet. for rehearing filed Sep. 1, 2023)]

"If you're a recordkeeper or third-party administrator, would the rule change any aspect of your relationships with investment brokers and advisers? If you provide services as a Section 3(16) administrator, are you ready to defend claims that you knew an investment adviser breached and you didn't do enough to remedy that other fiduciary's breach? And how about your own business: [1] Even as only a third-party administrator, do you sometimes help an employer select a participant-directed plan's 'menu' of investment alternatives? Or do you as a part of your business help an employer select a recordkeeper and that choice means taking on some of the recordkeeper's or its affiliate's investments? [2] Do you get any compensation, however indirectly, you would not get unless the plan made a choice under #1?"

"Consistent with its mission, ARA for over 20 years has raised concerns that the existing regulatory definition of investment device is ill-suited for advice given to plan sponsors with respect to participant-directed 401(k) retirement plans.... [ARA supports] DOL's proposed retirement security regulation updating the definition of investment advice under ERISA because ... it will ensure that advice given to plan sponsors with respect to plan investments under any and all circumstances is required to comply with the fiduciary standards of ERISA."

"Given the framing of the Advisory Opinion, the biggest issue is the 'inherently factual' one of whether Citi, as sponsor, in furtherance of its own business purposes -- having Citi 'viewed favorably by its employees, the general public, its shareholders, potential customers, business partners, and other interested parties' -- has (despite its representations) tried to influence committee decisions."

"[B]est practices call for a well-structured, governed, and documented investment committee tasked with selecting and monitoring the plan's investments.... [W]hat more can you do to protect yourself from similar claims? A good place to gain insights are the lawsuits themselves and the handful of related published opinions."

"Litigation has led to changes in plan design such as encouraging open architecture, which features products from multiple providers rather than just those offered by a plan's record keeper ... Lawsuits also have prompted ... increased fiduciary attention to the offering of company stock in 401(k) plans, focusing on services and documenting activities due to ERISA's emphasis on process, ... Although DC industry members often speak harshly of ERISA lawsuits, some research shows sponsors are not only paying attention but also acting to reduce litigation risk."

"There are interesting parallels between the DOL's views in [Advisory Opinion 2023-01A ] and its most recent position on [ESG] factors with respect to investment decision-making involving ERISA plan assets. In both scenarios, fiduciary investment decision-making can comply with ERISA even when indirect financial or other benefits may flow to non-participants or the public-at-large, but fiduciaries must base their decisions on financial factors and a risk/return analysis that benefit the plans and their participants."

"It's not enough to just have the right insurance coverage. Organizations need to institute the right internal governance processes to manage their Fiduciary liabilities.... [1] Prepare proactively ... [2] Gather and document comprehensive records ... [3] Benchmark fees & monitor performance ... [4] Review fiduciary training regularly."

"Retirement providers must provide 408(b)(2) disclosures to plan administrators showing a detailed breakdown of all plan fees. These disclosures help employers assess the total cost of the 401(k) plan and the direct and indirect revenue each service provider earns."

"Sponsors (or their providers) must send these 401k fee disclosures: [1] Before eligible employees can join the plan and choose their investments. [2] At least once per year. [3] Within 30 to 90 days of a change, important changes to the plan or plan investments.... Additionally, providers must provide employees with a statement of 'Actual Charges or Deductions' at least quarterly."

"During the third quarter of 2023, 58 ERISA-related lawsuits were filed and/or updated.... The parties involved in the ERISA lawsuits in the third quarter included two financial firm, two healthcare firms, one university, five tech firms and other prominent organizations such as American Airlines Inc., FedEx, General Electric and Deloitte LLP. There were 17 ERISA lawsuits involving excessive record-keeping fees."

"[The authors] break down what you need to know to better understand expense ratios, including: [1] How expense ratios work; [2] How expense ratios can impact your investment decision; [3] What a reasonable expense ratio looks like; [4] What a good expense ratio is for a 401(k)."