Compliance April 19, 2016

Judge Says City National Was Self-Dealing in 401(k)

While it is not illegal to administer retirement plans in-house, a lawsuit filed by the Labor Department in 2015 alleged excessive fees were charged to plan participants as a result of compensation to City National's staff.
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A federal judge in the U.S. District Court for the Central District of California found that City National Corporation violated employee retirement laws when it chose its own staff to administer its employee retirement plan in exchange for millions of dollars of unchecked, unreasonably high compensation.

In a statement to PLANSPONSOR, City National Bank said, “We believe the court ruling is wrong. We are now proceeding to ask the court to reverse its ruling and to give us a fair hearing of the facts. If it fails to do so, we will appeal. We are confident that this initial ruling will ultimately be reversed.” The bank also said it adjusted fees several times.

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An investigation by the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) found that, through the end of 2011, plan fiduciaries and affiliates received millions of dollars in compensation, commissions and fees at the expense of the plan. Rather than outsource plan services to avoid potential conflicts of interest, or reimburse themselves for only direct expenses, City National Bank and other fiduciaries established compensation rates for the plan on par with those charged to the bank’s retail clients, the Labor Department said. By doing so, they created conflicts that resulted in multiple breaches of the Employee Retirement Income Security Act (ERISA).

The DOL alleged the compensation issues were compounded because City National Bank employees were not required to track the amount of time they spent working on plan issues. This allowed large and unreasonable fees to be charged to the plan, according to the complaint. Proper tracking and monitoring of expenses could have prevented this and limited plan expenses.

U.S. District Court Senior Judge Terry J. Hatter, Jr. found that City National and its subsidiaries violated ERISA by engaging in years of self-dealing. The court ordered the company to retain an independent, third-party fiduciary to assist in accounting for all compensation it received from the plan, in the form of mutual fund revenue from 2006 through 2012, plus lost opportunity costs, to correct its numerous ERISA violations. The department estimates this amount to exceed $6 million.

In its findings, the court agreed with the DOL City National failed to meet its duties as a plan fiduciary by accepting fees from the plan without any review or independent investigation into whether fees were reasonable; not reimbursing the plan upon discovering that it was charging unreasonably high fees; and not tracking any direct expenses for the plan.

The court also found that City National’s actions constituted violations of ERISA’s mandate that fiduciaries act prudently and only in the interest of the plan and its participants.

City National says it “provided colleagues with more than $93 million in profit-sharing and 401(k) employer contributions during the years in question. Our company is proud of its colleague retirement program, and we have always been committed to making sure it is administered properly and for the benefit of our colleagues.”

Compliance April 19, 2016

Fiduciary Rule Offers Positives for Retirement Plan Sponsors

Experts say plan sponsors will see an expansion of fiduciary services, and sponsors and participants will be offered more information to help them make informed decisions.
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The Department of Labor’s (DOL) new fiduciary rule creates some onerous requirements for retirement plan advisers, but in many ways will be a plus to plan sponsors and participants.

In a webcast hosted by PLANSPONSOR and sponsored by Voya Financial, Charlie Nelson, chief executive officer, retirement, at Voya Financial noted that because the rule expands the number of situations that are considered fiduciary advice, plan sponsors will see more disclosures and acknowledgements from advisers. The new rule adds to the 408(b)(2) provider fee disclosure requirements. For example, advisers must inform plan sponsors of the scope of monitoring investments.

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Bradford P. Campbell, counsel at Drinker Biddle & Reath LLP, added that the DOL reiterated in the rule that reasonable fees are not necessarily the cheapest.

Under the new rule, investment advice is:

  • Recommendation as to acquiring, holding, disposing of or exchanging investments [this includes plan menu];
  • Recommendation of distributions or rollovers to participants and IRA owners (including whether, in what amount, in what form, or where to) [will affect how participants leave the plan];
  • Recommendations of fiduciary advisers; or
  • Recommendations of type of investment account (e.g. brokerage vs. fee-based).

For this reason, many common services provided by investment advisers are now fiduciary activities under the Employee Retirement Income Security Act (ERISA).

According to Campbell, there is probably not a role now for non-fiduciary advisers. “Someone who helped picked a plan menu but was not a 3(21) fiduciary will now need to be one or change the service they offer,” he said.

This could be a plus for retirement plan sponsors. “There will be many more fiduciary advisers than currently, and we may see advisers trying to offer more services to try to distinguish themselves from each other,” Campbell said. He also predicts advisers will offer more sophisticated services, move to become 3(38) investment managers, or offer off-the-shelf asset allocation funds they manage themselves to differentiate themselves.

NEXT: Rollover advice to participants and participant education

According to Nelson, plan participants will see increased documentation for rollovers and roll-ins. They will be provided information about the expenses and services for each investment option, as well as a comparison of expenses of an IRA with that of rolling into a new plan or leaving assets in a previous plan. “Participants will have a complete picture of the impact for them,” he said. He speculates this may result in more assets staying in retirement plans when participants leave the plan sponsor company.

Campbell speculated that advisers may now suggest other distribution options to plan sponsors to retain assets in the plan.

Nelson added that this has implications for non-ERISA and governmental plans. Advice about rolling assets from one governmental plan to another, or one non-ERISA plan to another does not fall under the new rule. However, advice about rolling assets from an ERISA-governed plan or IRA into a governmental or non-ERISA plan is now fiduciary advice.

Plan sponsors need to think about this—whether they are giving advice in enrollment meetings about rolling into the plan, Campbell said. Nelson added that all plan sponsors should review their call-center scripts, especially pertaining to distributions from the plan.

Campbell pointed out that automatic rollovers of retirement accounts less than a certain amount are under a safe harbor and not affected by the new rule.

Campbell mentioned that the participant education provisions in the new rule are actually an improvement on current rules. In addition to education about how the plan works, what is dollar cost averaging, what lifetime income needs participants have, educators can now provide asset allocation models, i.e. explaining how someone of a specific age should invest, that mention specific plan investments, but only if the investments are designated investment alternatives, and they must mention other similar types of funds.

Retirement income calculators and online tools personalized to participant information generally are not counted as advice, Campbell said. “However if the tool tells participants they should buy this annuity or what specific investment in the plan they should choose, that is fiduciary advice.

Nelson said he generally expects an expansion of tools that facilitate participants’ ability to make informed decisions, i.e. decision making trees, as a way to help participants think through and gather information in a concise way so they can make informed decisions about investing and rollovers.

NEXT: Implications and a potential negative

Nelson said the new rule may accelerate the demand for managed accounts in plans. “Participants are looking for advice, and it is now more challenging for advisers to provide that.”

When it comes to rollovers, Campbell said plan sponsors may want to consider what, if any, steps to take to address who is soliciting participants and whether the roll-in or rollover process should change moving forward.

In addition, according to Campbell, plan sponsors should make sure they know what kind of adviser they have now, and how will the new rule change what the adviser does or what it costs. Costs can be a potential negative for plan sponsors. “I think there will be more significant costs to advisers than the DOL estimates and ongoing compliance costs will be high,” he said.

Campbell speculates there will be some shifts in the marketplace about what service providers want to provide, and education will be delineated between those who want to make advice intentionally and those who don’t. Plan sponsors should consider what type of adviser they want to work with.

Nelson added that sponsors may see a narrowing of product offerings from providers and advisers, but they will still make sure they have the optimal number of offerings for the best interest of clients.

Campbell concluded that there are still some foggy areas in the rule. “There will be questions asked of the DOL and I expect further guidance and Q&As from the DOL providing clarification,” he says.

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