New DOL Proposal Would Allow Fiduciaries to Self-Correct Certain Errors

If certain conditions are met, the proposal would allow fiduciaries to correct mistakes themselves without incurring a civil penalty.

The Department of Labor has proposed a rule, released on November 21, that aims to simplify and expand its Voluntary Fiduciary Correction Program.

If adopted, the rule new would allow fiduciaries to self-correct for participant contributions that are not invested or participant loan repayments that are not repaid and then notify the DOL after the fact. Under current rules, fiduciaries have to apply to the DOL for permission to correct the issue. Other erroneous transactions must continue to be fixed under current rules.

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In order to be eligible for the self-correction method, the error would also need to be no more than 180 days old and the total participant losses cannot exceed $1,000.

Matt Hawes, a partner at the Morgan Lewis law firm, explains that the two eligible types of transactions, as well as the $1,000 threshold, were selected due to their relative frequency. Hawes notes the DOL estimates that 74% of VFCP applicants would be eligible for self-correction under the proposal.

According to an emailed release from the Wagner Law Group, late matching contributions are a technical issue handled by the IRS’s correction process, not an ERISA violation, and therefore not at issue under this proposal.

Hawes says that new process would save fiduciaries some time and hassle, but not an enormous amount. Under the proposed rule, fiduciaries would still need to fill out a checklist and keep certain documents listed in Appendix F of the proposal (Page 131). As part of their self-correction notification, plan sponsors would have to provide the DOL: an explanation of the breach, proof of payment, printable results from the DOL’s online calculator after calculating losses, the plan sponsor’s policies to prevent similar errors in the future and a perjury statement.

Hawes also notes that self-correction is not necessarily risker than the existing VFCP method, but some sponsors might still use the VFCP, since it comes with the additional comfort of DOL pre-approval, which could theoretically reduce the risk of penalties or an unfavorable audit.

Jason Lee, an ERISA attorney and partner with Groom Law Group, says many fiduciaries already self-correct small mistakes of the kind the proposal describes and that the proposal is partially intended to encourage fiduciaries to notify the DOL of corrections they are already making.

Lee is not convinced that the proposed change would actually encourage fiduciary participation. Using the VFCP or self-correction process can possibly expose plan sponsors to extra scrutiny and put them on “DOL’s radar,” says Lee. He says filing the self-correction notice after the error has been fixed would be unattractive to a sponsor, since there is no material risk if they have already made the participant whole, and the proposed notification process is not much less tedious than the VFCP process.

Lee says the more significant change in the proposed rule is that if a plan purchases a bond from a party in interest (thereby participating in a barred transaction), when they correct the transaction, the plan can account for the interest that the asset generated. In other words, if the improperly purchased asset grows, the plan can keep the margin of growth while still returning the principal.

The DOL will be accepting comments on the amended and restated VFCP for 60 days from the proposal’s publication in the Federal Register.

Judge Grants Motion to Dismiss Ricoh Complaint

The two counts brought by plaintiffs were bounced by the Chief Judge for the U.S. District Court for the Eastern District of Pennsylvania, but the motion to dismiss was granted with leave to amend.

A federal district court chief judge has bounced both fiduciary breach claims brought in February against Ricoh USA by 401(k) retirement plan participants under the Employee Retirement Income Security Act.

The plaintiffs’ complaint—Keith Krutchen, Angel D. Muratalla and William Begani, V. Ricoh USA, Inc., the Board of Directors of Ricoh USA, Inc., the Ricoh Retirement Plans Committee and John Does 1-30—“fails to provide a reasonable inference that defendants breached their fiduciary duty to participants,” wrote Juan R. Sánchez, chief judge of the U.S. District Court in the Eastern District of Pennsylvania, who was not convinced by the plaintiffs’ arguments that the defendants’ conduct, as the 401(k)-plan sponsor, was imprudent or a violation of ERISA.

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“Plaintiffs fail to plausibly allege the committee breached its ERISA-imposed fiduciary duty by charging unreasonable recordkeeping fees,” Sánchez wrote. “Plaintiffs also do not state a failure to monitor claim against Ricoh and the Board, since this second claim is derivative of the first. Accordingly, defendants’ motion to dismiss will be granted.”

The motion to dismiss was granted with leave to amend, which permits the plaintiffs to amend the complaint and refile one time in an effort to state a cause of action.

The complaint fails because it does not “provide meaningful benchmarks by which the Court can assess the prudency of defendants’ actions,” Sánchez wrote. “A meaningful benchmark must include both the quality and type of recordkeeping services provided by comparator plans to show that identically situated plans received the same services for less.”

The plaintiffs’ lawsuit alleged two counts against the plan sponsor for breach of fiduciary duty to participants and failure to monitor plan fiduciaries. The plaintiffs alleged in the complaint the plan sponsor failed to use its substantial bargaining power, by virtue of its size, to negotiate lower fees for investments, plan administration and recordkeeping services.

“Since Count I does not state a claim, neither does Count II,” Sánchez wrote. “A failure to monitor claim cannot survive without an underlying breach of an ERISA-imposed duty. Plaintiffs do not plausibly allege a breach of fiduciary duty, so they do not plausibly allege a failure to monitor.”

As of 2020, the plan had more than 18,619 participants and more than $2.1 billion in assets under management, according to the complaint.

Sánchez confirmed that mismanagement of plan expenses—overcharging for recordkeeping and administrative fees—is a breach of fiduciary duty, because excessive fees can erode the value of an account in a defined contribution plan. But the plaintiffs failed to show the court “substantial circumstantial evidence” at the pleading stage for the court to sanction the conduct by the plan sponsor as imprudent, Sánchez wrote. Such evidence may include the range of investment options, reasonableness of fees, selection and retention of investment options and practices of similarly situated fiduciaries, he wrote.

The plaintiffs’ complaint fails to survive defendants’ 12(b)(6) motion to dismiss, brought under the Federal Rule of Civil Procedure, because it does not include any information about the specific services used by Ricoh’s 401(k) plan or the benchmark comparator plans, according to the court memo.

“Without this ‘apples to apples’ information this Court cannot assess whether the plan even pays for the same services as its comparators, much less what ‘similarly situated fiduciaries’ would do,” wrote Sánchez.

Citing relevant precedent in Sweda v. Univ. of Pa. Sánchez stated, “a breach of fiduciary duty under ERISA occurs when ’(1) a plan fiduciary (2) breaches an ERISA-imposed duty (3) causing a loss to the plan,’ … [but here] plaintiffs only contest the second element: whether the Committee breached its duty of prudence in managing the Plan,” according to the court document.

Sánchez referred to the 3rd U.S. Circuit Court of Appeals’ decision in Sweda to outline some of the key factors the plaintiffs would need to include if they amend and refile.

A Ricoh spokesperson said the company is pleased with the ruling by the court, in an email.

“Ricoh USA, Inc. takes great care in the prudent management of its retirement savings plan,” the spokesperson said.

The original filing can be found here.

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