Compliance October 19, 2022

A Look at Proposed Regulatory Changes to Crypto and Retirement Plans

The environment for crypto could change as it becomes more accepted in retirement products.

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A bill from earlier this year that seeks to provide comprehensive regulation to digital assets and aims to clarify the way cryptocurrencies are regulated was discussed at a conference hosted by Georgetown’s Psaros Center for Financial Markets and Policy.

Speaking at last week’s event, Sens. Kirsten Gillibrand, D-New York, and Cynthia Lummis, R-Wyoming, discussed legislation they sponsored called the Responsible Financial Innovation Act, that would clarify which digital assets should be regulated as commodities under the authority of the Commodity Futures Trading Commission and which are securities to be regulated by the Securities and Exchange Commission.

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The senators said the bill recommends applying the “Howey Test” in determining whether a particular digital asset is a commodity or security. The Howey Test is a four-prong test, and if all four criteria are met, the item is deemed a security. The criteria are that an investment of money must be made; the investment must be made in a common enterprise; that enterprise must have an expectation of profit to the investor; and that profit is to be derived from the profit of others. Under this framework, the large majority of digital assets would be considered securities, but certain cryptocurrencies such as Bitcoin and Ethereum would likely be commodities since they are considered replacements for sovereign currencies.

The legislation would also require the Government Accountability Office to conduct a study on the involvement of cryptocurrencies in retirement plans and the risks and the opportunities that would come with their inclusion in those accounts. Title V of the bill would also require crypto businesses to make certain disclosures to consumers, such as the risk associated with crypto, the source code for the asset, and the asset’s legal treatment. The bill would also require federal executive branch agencies to develop security guidelines Yuan (Chinese currency) on U.S. government devices.

The bill is still in the committee markup stage in the Senate and Gillibrand expressed optimism that it could be passed this year, However the legislation has not yet come to a Senate vote and has not been put forward in the House yet. If unpassed by January, the bill would need to be reintroduced in the next Congress.

Sen. John Hickenlooper, D-Colorado, who is not a co-sponsor on the Gillibrand-Lummis legislation, sent a letter to the SEC last week urging them to clarify which digital assets are securities, to determine what disclosures are necessary, and establish a registration regime for digital asset trading platforms.

The interest in crypto in retirement plans has been growing but is still controversial. An expert on another panel at the Psaros Conference, Anna Paglia, the global head of ETFs at Invesco, said that when it comes to crypto “make sure you only invest the portion you are willing to lose completely,” and “I don’t know if I would ever recommend it.”

BitWage, a provider of Bitcoin, and ForUsAll, a 401(k) provider, have recently come together to allow participants in employer-sponsored retirement plans to invest up to 5% of their total portfolio into cryptocurrencies. Fidelity also unveiled a retirement product earlier this year, the Fidelity Digital Assets Account, which would permit investment up to 20% of a retirement portfolio’s value.

Brian Shroder, the CEO of Binance, said at the Psaros Conference that approximately 70% of the crypto trading on his platform is “institutional” suggesting that these sorts of retirement products may yet become more accepted in the retirement investment space.

Compliance October 19, 2022

Union Multiemployer Plan Faces ERISA Lawsuit

Plaintiffs have alleged fiduciary breaches against retirement plan fiduciaries for the International Union of Elevator Constructors.  

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Retirement plan participants have brought a class action lawsuit against the International Union of Elevator Constructors and the multiemployer 401(k) retirement plan on behalf of members of the elevator constructors union. The suit alleges excessive fees for plan services.

The named defendants to the lawsuit include the executive board of the union, the board of trustees of the Elevator Constructors Annuity and 401(k) Retirement plan, and 30 unnamed individuals.

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“The plan was saddled by outrageous per participant fees,” the complaint states.

The plaintiff’s complaint asserts two counts against the international union and board defendants—alleging  fiduciary breach of prudence to participants, against the committee and failure to monitor other fiduciaries to the plan.

“Defendants did not adhere to fiduciary best practices to control plan costs … such as monitoring investment management fees for the plan’s investments, resulting in several funds during the class period being more expensive than comparable funds found in similarly sized plans—conservatively, plans having over [$]in assets,” the complaint states. “Had a prudent process been used, the plan would not have been saddled with a total plan cost that was more than 160% higher than the median for similar plans.”

The plan had at least $2.6 billion in assets under management during the class period, the court filing shows and over 29,000 participants as of 2020. The plan’s asset amount qualifies it as a jumbo plan in the defined contribution plan marketplace, and among the largest plans in the United States, according to the plaintiff’s complaint.

Attorneys for the plaintiffs have alleged that the plan’s recordkeeper, Mass Mutual, charged between $95 and $125 per participant—from 2016 to 2020—for recordkeeping and administration services.  

The complaint argues, as a ‘jumbo’ plan, fiduciaries for the union plan should have been able to negotiate lower recordkeeping costs, ranging from $14 to $30 per participant.

“Anything above that would be an outlier especially later in the class period when [recordkeeping and administrative] costs per participant should have been at the cheapest,” the complaint states.  

Plaintiffs’ have alleged against fiduciaries near identical excessive fee claims for the plan’s investment management fees and the 401(k) target-date fund that was used as the plan’s qualified default investment alternative, in the complaint.  

From 2016 to 2019, the plan’s target-date suite was the T. Rowe Price Advisor Class series, that carried expense ratios from 92 basis points to 97 basis points for the 2060 fund, the court filing shows. In 2019, the plan moved to the T. Rowe Price Investor Class Series that had expense ratios ranging from 53bps for the 2030 fund to 59bps for the 2060 fund.

“The Investor class was a choice which was still not the best choice for the plan,” the complaint states.

Plaintiffs allege plan fiduciaries move to the less expensive suite “was too little too late as to the damages to the plan had already been baked in,” and further, management failed to use remaining, less costly options for plan participants, according to the complaint. 

“[T]he plan could certainly have qualified for the [collective investment trust] version of this target-date fund,” the complaint states. “The CIT version is nearly identical to its mutual fund version in all material respects having the same fund managers and same underlying investments.”

The complaint shows that a version of the CIT carried a 46bps fee for all target-date years from 2020 to 2060.

“Had either the CIT version of this target-date suite or the Investor Class version been selected from the inception of the class period, the plan would have realized greater savings, which would have compounded over the years,” plaintiffs allege.

Citing Supreme Court precedent from the ruling in the 2022 decision Hughes v. Northwestern Univ., the plaintiffs asserted plan fiduciaries have a continuing duty to monitor investments and remove underperformers.

While the complaint is typical of excessive fee claims, it is uncommon for such lawsuits to target a multiemployer plans’ defined contribution plan.

The complaint erroneously termed the Taft-Hartley union plan “a multiple employer plan.” The plan is, in fact, a multiemployer plan for union members.

Plaintiff’s attorneys, from Harrisburg, Penn.-based law firm Capozzi Adler, filed the complaint in the U.S. District Court for the Eastern District of Pennsylvania. The attorneys argued for the court to certify the class period as any time between October 13, 2016, through the date of judgment.

The Elevator Constructors Annuity and 401(k) Plan was a 2019 finalist for Plan Sponsor of the Year. 

The International Union of Elevator Constructors is headquartered nationally in Washington, D.C. The principal place of business is in Newton Square, Penn.

Requests for comment to the union on the lawsuit were not returned. 

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