News

"DOL has expressed concern that the 'regular basis' and 'mutual agreement' prongs of the prior Five-Part Test 'worked to defeat legitimate retirement investor expectation of impartial advice' and attempted to close these perceived loopholes in the Retirement Security Rule .  ... On May 2, 2024 (or 9 days after the Final Rule was adopted), the FACC filed its complaint in the United States District Court for the Eastern District of Texas." [Federation of Americans for Consumer Choice Inc. v. DOL, No. 24-0163 (E.D. Tex. complaint filed May 2, 2024)]

"The Court ... [held] that Plaintiff failed to state a claim for imprudence because he did not plead any facts showing how the fiduciaries' process in selecting and monitoring plan investments was flawed, did not plead any facts showing that the plan's recordkeeping fees were excessive in relation to the services rendered, and did not identify any specific misrepresentations Schenker made." [ Partida v. Schenker Inc. , No. 22-9192 (N.D. Cal. Mar. 29, 2024)]

"To obtain the protection of PTE 2020-02, four categories of 'conditions' must be satisfied.... This article [covers] the conditions that are effective on September 23 of this year.... [1] The Impartial Conduct standards: care obligation; loyalty obligation; reasonable compensation limitation (including best execution, if applicable); [and] no materially misleading statements (including by omission). [2] The Fiduciary Acknowledgement Disclosure."

"[W]ith this new package DOL believes it has addressed the concerns articulated by the Fifth Circuit in a way that advances the DOL’s concerns about the harm suffered by those who receive conflicted advice. If the DOL’s rule stands, going forward, a new somewhat nuanced paradigm will prevail and, in many instances, financial salespeople and insurance agents will be held to a relationship of trust and confidence with their retirement investor customers[.]"

"The decision is notable for articulating the level of detail that may be sufficient in the Fifth Circuit for these kinds of claims to survive a motion to dismiss.... With respect to the recordkeeping fee claim, the Fifth Circuit's requirement that plaintiffs plead that similarly-sized plans received similar services for lower fees is consistent with the standard set in other jurisdictions. " [ Perkins v. United Surgical Partners International, Inc. , No. 23-10375 (5th Cir. Apr. 11, 2024; unpub.)]

"The amendments describe how advisers should mitigate their conflicts in the PTE's preamble and section on policies and procedures.... The DOL says explicitly that they do 'not require Financial Institutions to categorically eliminate all sales quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, sales contests, quotas, or bonuses.' "

"Plan sponsors should review their services agreements and reach out to their financial services providers to ensure that they come into compliance with the new rule, including full disclosure of any potential conflicts of interest. Plan sponsors should also monitor requests for employee data and other communications between their service providers and their employees and other plan participants -- in particular, communications sent out when an employee is retiring or otherwise separating from service or a participant becomes eligible to take a distribution of benefits for any other reason."

"[T]he 2024 Final Rule expands the universe of entities that would be considered investment advice fiduciaries under ERISA and corresponding provisions of the Code. In order to receive compensation that varies based upon their recommendations, investment advice fiduciaries must find exemptive relief, which PTE 2020-02 supplies.... DOL has made many other exemptions unavailable to investment advice fiduciaries, with the result that PTE 2020-02 largely stands as the only available option for exemptive relief in many cases."

"[P]rograms that rely on PTE 77-4 when providing advice would be required to consider a different compliance framework. Options might include eliminating the fee conflict through an offsetting approach or relying on PTE 2020-02 . Moreover, those relying on PTE 77-4 within discretionary management structure may be forced to rely on PTE 2020-02 when recommending that retirement investors participate in the program and then rely on PTE 77-4 when managing the assets."

"Under this court's ruling, ERISA is not a law of process as designed, but a liability trap that allows the trial bar to challenge any process-based decision they think can be leveraged into settlements and legal fees. This case ... should inform plan sponsors that they face increased liability if they retain investments placed on a watchlist for even a single quarter. Plan sponsors are also at a higher risk of liability if they retain investments that are challenged in other excess fee cases, even if those lawsuits are meritless." [ Sellers v. Trustees of Boston College , No. 22-10912 (D. Mass Apr. 11, 2024)]

"Callan's recently released 2024 Defined Contribution (DC) Trends Survey ... found top areas of focus for DC plan sponsors include plan governance and process, investment management fees, and administration fees. Fiduciary initiatives in 2023 centered on reviewing plan fees, the investment policy statement, and the investment structure -- things the survey found will also be top areas of focus in 2024, with reviewing plan fees as the highest priority (74%)."

"The rule/guidance package  ... will turn many persons -- critically, call center operators affiliated with financial institutions -- who previously understood themselves to be 'just service providers' into 'advice fiduciaries.' ... Sponsors will want to ... discuss with their providers how they intend to comply with the new advice fiduciary rule/PTE.... [T]here may be situations in which sponsor officials themselves, e.g., discussing plan investment decisions with plan participants, might be considered advice fiduciaries."

"The Department's release emphasized key differences between the 2024 Fiduciary Rule and the 2016 Rule, including the 2024 Fiduciary Rule's absence of any requirement that advisers and financial institutions give their customers enforceable contract rights for noncompliance.... Also missing is the Department's prior proposal requiring financial institutions, insurers, and others taking advantage of certain ERISA PTEs to disclose their compensation arrangements on a public website."

"The expanded definition of fiduciary advice in the regulation will cause many more people and firms to be fiduciaries when they make investment recommendations to retirement investors. The most important definition is the one for non-discretionary recommendations."

"Average costs for workers covered by a small plan would drop to 75 basis points from 93 basis points ... Participants would save over $55 billion in the first 10 years and over $130 billion in the subsequent 10 years ... Over 80% of these savings would be experienced by small-plan participants, of which there are currently more than 20 million.... [R]etirement investors rolling into fixed-index annuities will save over $32.5 billion in the first 10 years and over $32.5 billion in the subsequent 10 years."

"Robo-advisors provide software-based management tools for investing. Portfolios managed with a robo-advisor generally tend to be cheaper to use than human-advised portfolios. These cost savings can add to your company's bottom line. Robo-advisors intend to keep portfolios optimally diversified, which could lead to better returns over time for plan participants."

"Under the final rulemaking , trusted advisers will have to: [1] Meet a professional standard of care when making recommendations (give prudent advice); [2] Never put their financial interests ahead of the retirement investor's when making recommendations (give loyal advice); [3] Avoid misleading statements about conflicts of interest, fees, and investments; [4] Charge no more than what is reasonable for their services; and [5] Give the retirement investor basic information about the adviser's conflicts of interest.... The rule and exemptions are carefully designed to honor retirement investors' legitimate expectation of advice that is in their best interest."

"The final definition is substantially broader than the 1975 rule, however, it is significantly narrower than DOL's 2023 proposal. As an example, DOL has recognized that a variety of sales activity does not give rise to fiduciary status.... This opens up a range of possibilities for interactions amongst sophisticated parties to remain non-fiduciary in nature in a way that may not have been possible under the Proposal.... While most of the changes [to PTE 2020-02 ] added burdens, e.g. , expanded disqualification provisions, DOL did respond to some industry requests for more flexibility ... [T]he final PTE 84-24 amendment considerably narrows the community of insurance professionals eligible for exemptive relief for the receipt of compensation in connection with the recommendation of insurance and annuity products."

"The final rule narrows the contexts in which a covered recommendation will constitute ERISA fiduciary investment advice and makes clear that the test for fiduciary status is objective ... [A] new paragraph in the regulatory text confirms that sales recommendations that do not satisfy the objective test will not be treated as fiduciary advice, and that the mere provision of investment information or education, without an investment recommendation, is not advice within the meaning of the rule."

"Here we have ... another case of a federal judge noting that the thresholds for considering a motion to dismiss a case before those presentations and discovery are required to be tilted in favor of the party not pushing for dismissal -- the participant-plaintiff. All of which feels uncertain in the result(s), and certainly inconsistent between federal district courts[.]" [ Brookins v. Northeastern Univ. , No. 22-11053 (D. Mass. Apr. 17, 2024)]

"The Fifth Circuit held that by not replacing a plan's retail shares with cheaper, allegedly identical institutional shares, the district court could reasonably infer that the plan's committee breached its duty of prudence under ERISA. Separately, the Fifth Circuit appears to have departed from other Circuits in concluding that plaintiffs adequately pleaded a claim for 'high recordkeeping costs.' " [ Perkins v. United Surgical Partners International, Inc. , No. 23-10375 (5th Cir. Apr. 11, 2024; unpub.)]

"Though the Committee offered one plausible explanation for United's decision to include retail shares, the court found that another plausible explanation is that the Committee included retail shares in the Plan due to mismanagement. The court concluded that Defendants failed to refute Plaintiffs' allegations about the more expensive retail shares and that Plaintiffs sufficiently allege a plausible breach of the duty of prudence." [ Perkins v. United Surgical Partners International, Inc. , No. 23-10375 (5th Cir. Apr. 11, 2024; unpub.)]

"The final amendment comes two years after the proposed amendment brought pushback from investment managers. Eligibility requirements have tightened, and QPAMs will have to be more vigilant to maintain the exemption.... While there are no immediate steps plan sponsors need to take in reaction to the final amendment, plan sponsors engaging QPAMs should be aware that QPAMs will have increased compliance requirements, which may lead to additional costs."

"Here are four reasons you might consider conducting a search even if you feel your fees and services are reasonable. [1] Leverage for further reducing fees ... [2] Fiduciary liability insurance ... [3] Better service ... [4] Fiduciary risk."

"In its new 2024 24th edition of the small-plan recordkeeping fee survey, the 401k Averages Book changed how it documents the recordkeeping fee for smaller plans by including indirect, asset-based recordkeeping fees from investments in the fee benchmark. This should eliminate the deceptive claims used in many excessive fee lawsuits that mispresent the 401k Averages Book benchmarks by excluding the substantial indirect fees paid by smaller plans."