Compliance July 3, 2024

American Benefits Council Lays Out Plan to Increase Gig Worker Retirement Plan Enrollment

PEPs play a key role in the proposal to Louisiana Senator Bill Cassidy to get more independent contractors saving for retirement.

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The American Benefits Council responded to a request for information from Senator Bill Cassidy, R-Louisiana, providing recommendations on how retirement benefits can be improved for independent contractors, including so-called gig workers.

The RFI issued June 5 asked for “feedback from stakeholders on ways to modernize federal law to allow independent workers access to portable workplace benefits like retirement and health care.” According to the RFI, there are “at least 27 million Americans engaged in independent work.”

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Specifically, stakeholders were asked for their views on how to define independent contractor, how legal uncertainty undermines workers, what legal obstacles exist to offering contractors benefits, and what benefits they most value, among other items.

The ABC responded with a five-point plan to improve benefit access for contractors that seeks to build on the existing benefits system: “We believe that what is needed is not an overhaul of the system but rather specific fine-tuning of the excellent framework that Congress has already established.”

The council’s response included suggestions such as making better use of pooled employer plans, which were introduced for defined contribution plans in the SECURE Act 2.0 of 2022, and promoting policies to make individual 401(k) savings more attractive to independent or gig workers.

PEP Push

The first point that the ABC raised was leveraging pooled employer plans, which could be used by companies who hire contractors to organize them into a single plan. By using a PEP, which is administered by a pooled plan provider as opposed to the firm itself, a company could make contributions to the PEP by way of payroll deductions while not carrying the burden of the being the plan sponsor.

In order to maintain legal certainty, Congress may have to clarify that such PEP arrangements would not compromise the contractor status of the workers involved.

The ABC also suggested that PEP rules be revised to be more palatable to employers with independent contractors. PEPs typically require an audit from an independent qualified public accountant once they reach 100 participants; the ABC recommends that a PEP whose participating employers have less than 100 employees be exempted from this. Since contractors are considered businesses with a single employee, a PEP could conceivably have any number of contractors in it and still not require a costly audit.

Improving the System

In terms of individual saving options, the ABC noted that independent contractors can already make a 401(k) for themselves via a SIMPLE individual retirement account or a simplified employee pension plan. But in reality, many contractors are not aware of this or do not have the wherewithal to make one, the organization noted. Congress would have to push for agencies to promote these programs, as well as PEPs, on their websites and in other venues to increase uptake.

The ABC also proposed a similar change for contractors participating in a defined contribution group. DCGs allow plans with certain identical features to file a consolidated Form 5500. The ABC recommended that independent workers be allowed to file a consolidated audit as well.

The ABC’s last point was that Congress should increase the threshold at which a business owner is not required to file a Form 5500. Under current rules, a business owner can file a Form 5500-EZ, an abbreviated Form 5500, if the plan only covers the owner and their spouse.

But if the balance of the plan is $250,000 or less, the business owner does not need to file the form. The ABC wrote that this limit was set in 2007, but with inflation, it should now be about $375,000, a threshold that would permit more contractors to avoid filing if they chose to sponsor their own personal plan. The ABC recommended that Congress change the threshold to align with the current market.

Cassidy’s office, which will be reviewing responses, has not yet disclosed other responses it received.

Compliance July 3, 2024

Lawsuit Against NYC Pension Funds’ Divestment in Fossil Fuels Dismissed

A New York State judge dismissed the complaint due to lack of standing and failure to demonstrate injury.

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A New York State judge on Wednesday dismissed a lawsuit brought against pension funds for New York City workers, alleging the funds’ divestment from securities of certain fossil fuel companies jeopardized the retirement security of participants.

New York State Judge Andrea Masley ruled the plaintiffs, including four city employees and the conservative nonprofit Americans for Fair Treatment, lacked standing to bring the case against the New York City Employees’ Retirement System, Teachers’ Retirement System of the City of New York and the Board of Education Retirement System of the City of New York. The plaintiffs had sought class-action status.

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Masley also ruled the accusers in Wong et al. v. NYCERS, brought in New York State Supreme Court, did not demonstrate sufficient injury. The accusers alleged the retirement security of plan participants was harmed by the plans’ divestment from securities of certain fossil fuel companies, constituting a fiduciary breach.

The plaintiffs “have not demonstrated sufficiently concrete or particularized harm,” wrote Masley.

The plaintiffs had argued they have a stake in the outcome of the litigation because the pension funds’ decisions about defined benefit plan investments had “a detrimental impact on the financial health” of their retirement plans and on the plans’ “ability to pay the pension benefits they owe.”

“However,” wrote Masley, the “plaintiffs’ allegations regarding their plans’ potential inability to meet their payment obligations are speculative.”

She added: “The pension plans at issue are also ‘defined benefit’ retirement plans. Thus, plaintiffs are entitled to a fixed benefit each month and will receive the same amount regardless of whether they win or lose this action. … Plaintiffs here have not, and will not, suffer any monetary losses based upon defendants’ investment decisions.”

In response to a question from PLANSPONSOR, Akiva Shapiro, a partner in Gibson, Dunn Crutcher LLP and the lead attorney for the plaintiffs, says by email, “We are reviewing the court’s decision and evaluating potential next steps.”

New York City Comptroller Brad Lander, a trustee to and investment adviser and custodian for the three pension funds, praised the order in a statement.

“This court’s decision is a big win for common-sense responsible investing, for New York City’s municipal workers and retirees, and for the future of our City and our planet,” Lander stated. “Our pension funds are implementing ambitious and well-researched plans to address the material risks of climate change—including divesting from fossil fuels, investing in renewable energy and climate solutions, and actively engaging with our asset managers and portfolio companies to reduce their financed emissions. I’m delighted that the Court dismissed this attempt by anti-ESG forces to undermine responsible investing and prevent the transition to a low-carbon economy.”

Attorneys for the pension funds filed a motion to dismiss the lawsuit in August 2023. The defendants relied on established U.S. Supreme Court precedent from Thole et al. v U.S. Bank N.A. et al.

The Supreme Court ruled in that case that the accusers lacked standing to challenge the plan’s mismanagement under the Case or Controversy Clause of Article III, Section 2 of the U.S. Constitution, according to Masley. The accusers in Wong contended Thole as precedent “is distinguishable because it involves the application of federal standing principles to a federal statute,” wrote Masley.

While this decision is “not a substantive one, it is nevertheless interesting [as] it draws from the reasoning of the Supreme Court’s decision under [the Employee Retirement Income Security Act] that makes it harder for participants in defined benefit plans successfully to allege breaches of fiduciary duty regarding the management of plan assets where those breaches aren’t likely to result in reduced benefit payments,” says Drew Oringer, a partner in and general counsel at the Wagner Law Group, which was not involved in the litigation.

“The court here recognized that the federal authority on standing is not applicable in this case, but ultimately found the Supreme Court’s reasoning to be persuasive,” Oringer explains. “If the court’s decision stands, resolution of the substantive question would have to wait until a party with valid standing asserts a claim.”

In 2018, the New York City pension funds’ trustees set a goal to prepare a five-year strategy to sell assets in fossil fuel reserve holdings. In 2021, the pension funds’ boards of trustees divested an estimated $4 billion from securities related to fossil fuel-producing companies.

When the lawsuit was filed in May 2023, the New York City Employees’ Retirement System held pension plan assets valued at $77.5 billion; Teachers’ Retirement System of the City of New York held $64 billion; and the Board of Education Retirement System of the City of New York held $5.9 billion, according to the complaint.

The plaintiffs include Americans for Fair Treatment and four individuals: a subway train operator, a public-school teacher, a school secretary and an occupational therapist in an elementary school, according to the complaint.

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