Magazine

Compliance Update | Published in February 2017

Compliance Update

Summaries of the latest news from Washington and the courts—what’s coming, what’s contemplated and what’s critical for plan sponsors to know

By PLANSPONSOR staff | February 2017
Art by Alex Eben Meyer
Prudent Default?
The Department of Labor (DOL) said in an information letter to Christopher Spence, senior director, federal government relations at TIAA, that a defined contribution (DC) plan can prudently choose a default investment for a plan that contains lifetime income elements. The letter was in response to a request regarding the application of the Employee Retirement Income Security Act (ERISA) to TIAA’s Income for Life Custom Portfolios (ILCP). The DOL notes that for an investment to serve as a qualified default investment alternative (QDIA), any participant or beneficiary on whose behalf assets are invested must be able to transfer those “in whole or in part” to any other investment alternative available under the plan as frequently as participants and beneficiaries may elect to invest in the QDIA, and no less frequently than once within any three-month period. The ILCP’s Annuity Sleeve does not meet this requirement, so the ILCP would not constitute a QDIA.
 
SCOTUS May Hear Case About Co-fiduciary Indemnifying Trustees
The Supreme Court of the U.S. (SCOTUS) has invited the solicitor general to file a brief in the case of Fenkell v. Alliance Holdings, Inc., U.S., No. 16-473, concerning whether the Employee Retirement Income Security Act (ERISA) permits courts to order one fiduciary to indemnify another. David B. Fenkell, a trustee, was found liable for his role in a series of complex transactions between the employee stock ownership plans (ESOPs) of Alliance Holdings Inc. and Trachte Building Systems Inc. Fenkell asked the justices to rule that ERISA does not allow plan fiduciaries to sue other fiduciaries for indemnification or contribution. Circuit courts are split on whether ERISA permits courts to order one fiduciary to indemnify another.
 
Court Denies Injunction of EEOC Wellness Program Rules
The AARP filed a lawsuit alleging that the Equal Employment Opportunity Commission (EEOC)’s final wellness program rules under the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) are arbitrary, capricious, an abuse of discretion and not in accordance with law. The AARP asked that the rules be invalidated. The organization started its complaint by saying that the EEOC rightly argued in 2014 in a lawsuit against Honeywell International that, because an employer imposed heavy penalties on employees through a coercive wellness program, those employees stood to “lose the fundamental privilege under the ADA and GINA to keep private information private.” Yet, the complaint says, in 2016, the EEOC issued regulations under the ADA and GINA allowing employers to impose heavy financial penalties on employees who do not participate in employee wellness programs. On average, these penalties would double or even triple the nonparticipating employees’ individual health insurance costs, the AARP claims.
 
IRS Releases Proposed Mortality Tables
The Internal Revenue Service (IRS) has revealed proposed regulations regarding mortality tables to be used by most defined benefit (DB) pension plans. These tables gauge the probability of survival year by year for an individual, based on age, gender and other factors. This data along with actuarial assumptions is used to calculate the present value of a stream of expected future benefit payments, for purposes of determining the minimum funding requirements for a plan. These mortality tables also may be used to determine the minimum required amount of a lump-sum distribution from such a plan.
 
The IRS also unveiled proposed regulations to update the requirements that a plan sponsor must meet in order to obtain the agency’s approval to use mortality tables specific to the plan for minimum funding purposes, instead of the generally applicable mortality tables. The methodology used to develop static tables would be tweaked to vary the projection by age and gender. For purposes of updating mortality improvement rates after 2018, the IRS and Treasury Department expect to consider the anticipated annual updates from the Society of Actuaries (SOA) Retirement Plans Experience Committee (RPEC).
 
Filing Instructions Updated by PBGC

A new guidance document released by the Pension Benefit Guaranty Corporation (PBGC) outlines the process for measuring and paying the two kinds of annual premiums owed by pension plan sponsors. The PBGC explains that flat-rate premiums apply to all plans, while the variable-rate premiums apply only to single-employer plans.

Every covered plan under Employee Retirement Income Security Act (ERISA) Section 4021 must make a premium filing each year; the due dates are described in the “When to File” section. The guidance outlines how plan sponsors must use the “My Plan Administration Account” portal to electronically submit premium filings in accordance with PBGC regulations. Electronic filings may be prepared using the data entry screens or with compatible private-sector software. According to the PBGC, the filing requirements for 2017 are almost identical to those for 2016. The key changes to note for 2017 relate to premium rates.
 
Claims in Excessive Fee Suit Tossed
A federal judge has dismissed complaints against Prudential Retirement, an employer and its adviser in an excessive fee suit. The participant who brought the proposed class action alleged that certain fees, including revenue-sharing payments, were kickbacks from mutual funds to Prudential. He also claimed that the 401(k) plan sponsored by Ferguson Enterprises included too many actively managed funds with higher fees than passively managed funds. Finally, he accused Prudential’s GoalMaker, an optional program within the plan that assisted participants in making their investment selections, of directing those individuals to invest in higher-cost mutual funds that engaged in revenue sharing with Prudential, causing the company to gain additional compensation at the expense of the plan and plan participants.
 
U.S. District Judge Victor Bolden of the U.S. District Court for the District of Connecticut first determined that Prudential was not a fiduciary with respect to the lawsuit’s allegations. Prudential did not have the contractual authority to delete or substitute mutual funds from its menu without first notifying Ferguson and ensuring its consent. In addition, Bolden found that the trust agreement strips Prudential of its discretionary authority over its own compensation, limiting that to the fee schedule provided to the employer, and requiring advance notice to the employer of any changes to the agreed-upon schedule. Bolden added in his opinion that, in light of the legal insufficiencies discussed in connection with the plaintiff’s claims, further amendment of the amended complaint would be futile. At oral argument, plaintiffs had described this case as part of a series intended to move the entire industry … more and more to zero revenue sharing, based on the notion that this practice is much less expensive for plans and for participants. Bolden said these goals, however worthwhile they may be, are incompatible with the purposes of the Employee Retirement Income Security Act (ERISA).
 
DOL Updates Guidance on Proxy Voting
The Department of Labor (DOL) Employee Benefits Security Administration (EBSA) has updated guidance for plan fiduciaries in regard to proxy voting by employee benefits plans. The agency released Interpretive Bulletin (IB) 2016-01; this withdraws IB 2008-2 and reinstates earlier guidance related to proxy voting (see “New Guidance on Proxy Voting.” The IB also comes with specific updates aimed at clarifying what the law requires of plan fiduciaries. Employee benefits plans often have large shares in publicly held companies. Therefore, the DOL has long held that it is important for plan administrators to know what their responsibilities are when they vote proxies on those shares or exercise other shareholder rights. It argues that existing guidance to plan fiduciaries has been out of step with domestic and international trends in investment management and has the potential to dissuade fiduciaries from exercising shareholder rights, including the voting of proxies, in areas increasingly being recognized as important to value for long-term shareholders. The new bulletin reinstates earlier guidance, IB 94-2, with key updates aimed at better assisting plan fiduciaries in understanding and meeting their obligations under the Employee Retirement Income Security Act (ERISA) with respect to proxy voting and shareholder engagement.

SPONSORED MESSAGES