Ask the Experts June 5, 2018

(b)lines Ask the Experts – Are 415(m) Plans Subject to the Premature Distribution Penalty?

“Are 415(m) plans subject to the 10% premature distribution penalty for early distributions from a retirement plan?”
Reported by

Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, retirement plan services, Cammack Retirement Group, answer:

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Before we get to our response, we should probably explain what a 415(m) plan is to everyone. As detailed in a prior Ask the Experts column, a 415(m) plan is a plan for public employers that is utilized for contributions that cannot be made to a 403(b) or other qualified plan, including a defined benefit (DB) plan, due to the application of the contribution/benefit limits under Internal Revenue Code (IRC) Section 415.

To find out if distributions from 415(m) plans are subject to the 10% premature distribution penalty in the event that a participant takes a distribution prior to age 59 1/2 (and does not qualify for another exception to the penalty, such as termination of employment in the calendar year in which an employee turns age 55 or older), we would consult IRC Section 4974(c), which identifies the types of plans that are subject to the penalty, as follows:

(c) Qualified retirement plan. For purposes of this section, the term “qualified retirement plan” means—

(1) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a),

(2) an annuity plan described in section 403(a),

(3) an annuity contract described in section 403(b),

(4) an individual retirement account described in section 408(a), or

(5) an individual retirement annuity described in section 408(b).

Such term includes any plan, contract, account, or annuity which, at any time, has been determined by the Secretary [of Labor] to be such a plan, contract, account, or annuity.

Notice the absence of 415(m) in the list of plans here? That is why such plans are not subject to the 10% penalty. This makes sense, given that these plans are nonqualified plans, similar to 457(b) deferred compensation plans in many aspects—even though nowadays governmental 457(b) plans have to be funded—and 457(b) plans are also not subject to the 10% premature distribution penalty. However, there is sometimes talk about changing that.

 

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 Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.
Compliance June 4, 2018

Invesco Accused of Self-Dealing in 401(k)

Plaintiffs allege the firm added poorly performing proprietary mutual funds to their plan.

Reported by

Invesco is the latest retirement plan services provider to become the target of a self-dealing lawsuit seeking relief under the Employee Retirement Income Security Act (ERISA).

The complaint was filed in the U.S. District Court for the Northern District of Georgia, Atlanta Division. The suit has a laundry list of defendants from across the Invesco organization, including individual officers and managers.

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Allegations leveled in the proposed self-dealing class action challenge vary widely and include many similar to other litigation. The plan is accused of offering too many investment options—nearly all of them affiliated in some way with Invesco—and of failing to use its leverage as one of the larger employer-sponsored retirement programs in the U.S. to negotiate for reduced costs for the benefit of plan participants.

Beyond these allegations, plan officials and Invesco leaders are accused of breaching their fiduciary duties by offering imprudent affiliated exchange-traded fund (ETF) investment products to participants. Further, the lawsuit alleges that the plan offered worse-performing retail shares instead of better-performing institutional shares.

The list of allegations goes on to suggest that the firm added poorly performing proprietary mutual funds to the plan; that it offered imprudent Invesco-branded target-date funds (TDFs) with high expenses and poor performance; and that the plan fiduciaries erred in connection with offering collective investment trusts (CITs). In particular, plaintiffs call out the allegedly imprudent offering of the Invesco 500 Index Trust Fund, the Invesco Mid Cap Growth Trust, and the Invesco Diversified Dividend Trust. In all, the complaint lays out six proposed counts for breaches of fiduciary duty and prohibited transactions.

Summarizing their allegations, plaintiffs suggest defendants did not consider or act in the best interest of the plan and its participants throughout the class period.

“Instead, defendants put their interests before the plan participants by treating the plan as an opportunity to promote and generate fees from proprietary investment products offered by Invesco and its subsidiaries,” they allege. “During the class period, Invesco and the other defendants used plan participants as a captive market for Invesco’s proprietary investment products to benefit Invesco. Instead of engaging in a prudent process to find the best investment options for the plan, defendants simply loaded it with Invesco proprietary investment options.”

According to the complaint, during the class period, between 93% and 95% of the plan’s investment options were affiliated with Invesco. Many of the plan’s investment options performed worse and/or had higher fees than other comparable unaffiliated investment options, the complaint alleges.

“The utter lack of a prudent process followed by defendants is also shown by the large number and type of investment options offered in the plan,” the complaint states. “Even though the typical 401(k) plan offers between 10 and 15 investments, the plan had approximately 150 to 205 options during the class period. Defendants indiscriminately dumped Invesco mutual funds, ETFs and other investment products into the plan in breach of their fiduciary duties.”

The plaintiffs seek to establish that the large number of options made their selection by plan participants confusing, especially as the plan allegedly offered multiple share classes—with different fees and performance results—of numerous funds.

“Furthermore, several investment options exposed plan participants to an undisclosed liquidity risk as a result of their investments in another proprietary Invesco fund named the Invesco Short Term Investment Fund, which was fined $10 million by the U.S. Department of Labor [DOL] for inappropriately using fund assets to artificially inflate the net asset value of that fund,” the complaint states. “Defendants acted in their own interests to the detriment of plan participants. Instead of carefully examining and selecting the most prudent investment options for the plan or prudently monitoring the plan to eliminate its poor investment options, defendants caused the plan to offer almost exclusively Invesco-affiliated mutual funds, collective trusts and ETFs enabling Invesco and its subsidiaries to earn lucrative fees and to increase its assets under management [AUM].”

To remedy these alleged fiduciary breaches and prohibited transactions, the lawsuit seeks to recover “all losses resulting from defendants’ breaches of fiduciary duty and other ERISA violations and restore to the plan any profits made by the fiduciaries or the persons and/or entities who knowingly participated in the fiduciaries’ imprudent and disloyal use of plan assets.”

Invesco declined to offer comment on the filing of the lawsuit, noting that it does not speak about ongoing litigation. The full text of the lawsuit is available here.

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