Ask the Experts October 11, 2022

How Important Are Proper Termination Dates for Retirement Plan Compliance?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

Reported by

“We are a large, complex health care system that sponsors a 403(b) plan for all the 501(c)(3) members of our controlled group, of which there are many. We have some issues with recording the proper dates of termination of employment for retirement plan purposes. One problem is that the process of reporting termination dates is a manual one, and some of our managers are simply more efficient at it than others. In addition, since it is not a payroll item, termination dates are not fed to our recordkeeper each payroll as part of our remittance feeds, but instead as a separate, less-frequent feed from our HRIS system. Finally, we have a lot of rehires, as well as employees who transfer between employer in our controlled group. This has resulted in our recordkeeper failing to capture some termination dates.

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We know we need to fix this, but how important are proper termination dates for retirement plan compliance purposes? As I’m sure the Experts can understand, there are a lot of competing benefits projects here, so I want to prioritize this project accordingly.”

Kimberly Boberg, Taylor Costanzo, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

You are certainly asking the correct question here, as there are varying levels of importance of retirement plan elements. For example, if you were having great difficulty tracking down lifetime employee contributions for 15-year catch-up purposes, the Experts might suggest not tracking that down and eliminating the 15-year catch-up election as an alternative.

But dates of employment are far from a minor element of a retirement plan; in fact, they are absolutely critical to retirement plan compliance. Termination of employment date is a key date for so many retirement plan provisions, such as small balance cashouts, eligibility for distributions, break in service rules for eligibility and vesting, required minimum distributions, post-employment 403(b) employer contributions, etc. Plan sponsors who don’t ensure that termination of employment dates are 100% accurate run the risk of disqualification or significant sanction upon audit.

Thus, the termination of employment date issue should be a high priority, and you should work with your IT department and your recordkeeper to ensure 100% accuracy. If that is not possible, you may wish to consider hiring a Third-Party Administrator, or TPA, to address termination date accuracy.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice. 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

Compliance October 10, 2022

Quanta Services Sued in ERISA Lawsuit

The energy company was sued by two former employees for keeping poorly performing options on its retirement fund menu.

Reported by

Two former employees of Quanta Services in late September brought a class action suit against the company under the Employee Retirement Income Security Act, alleging that Quanta had maintained underperforming and expensive investment options in its sponsored retirement plan.

Quanta Services, an electrical power company, sponsored a retirement plan that covered 16,317 participants, with $1.21 billion in assets as of December 21, 2020, according to the lawsuit.

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The lawsuit alleges that a plan of this size should have greater bargaining power to negotiate lower fees. The plan, however, kept high-cost and underperforming actively managed funds when better alternatives were available, such as passive index funds, according to the plaintiffs.

The suit preempts a common argument made by defendants in ERISA cases that the funds maintained by a sponsor cannot be fairly compared to higher-performing competitors because “competitors are not comparators.”

To address this “apples and oranges” problem, the lawsuit alleges that the point of actively managed funds is to outperform index funds in order to justify their higher cost. Their reason for existence is comparative: to grow faster than passive funds and justify their higher management cost. This makes them ripe for comparison, the lawsuit alleges, and their inclusion in a plan when better passive funds are available violates the fiduciary’s duty of prudence and duty to monitor on behalf of participants.

The plan sponsor did not compare active fund to index plans, however, and also kept an active target date fund as the plan’s “Qualified Default Investment Alternative” or QDIA. A QDIA is a default investment that a plan may offer as a recommendation to participants that lack the knowledge or confidence to select their own, and their assets would be invested in the QDIA if they do not select a fund themselves.

The plaintiffs allege that an active TDF should not have been the QDIA, since active funds typically underperform passive funds in the long run. To this end, the plaintiffs cited data showing that passive funds gained $40 billion in net inflows from 2016 to 2020, and active funds  suffered $35 billion in net outflows over the same time period, reflecting a collective market endorsement of passive over active, according to the complaint. They also allege that actively managed funds tend to contain more high-risk assets such as high-yield bonds.

Specifically, the suit noted the American Beacon Small Cap Value Fund and the DFA International Small Cap Value Fund, both of which, according to the complaint, underperformed their own benchmarks for several consecutive quarters. Since Quanta did not remove these funds in a timely manner, it failed its duty to prudently monitor their retirement options, costing the plaintiffs and the class money in their total savings.

Active funds are not considered a per se violation of ERISA.

Quanta Services did not return a request for comment.

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