Ask the Experts October 4, 2022

When Can an Employee in a 457(b) Plan Use A Three-Year Catch-Up Election?

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

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“We are a private university who sponsors, among other plans, a 457(b) plan for our select management and highly compensated employees. The plan contains the three-year catch-up election for employees who are within three years of the normal retirement age of the plan (which in our case is 65). Our question is, can the employee actually use the election in the year in which he/she turns age 65 if he/she qualifies? We have an employee who turns age 65 in 2022 requesting that she use the election, but we think it might be too late for her to use the election, as she would have had to use it in the years that she turned ages 62, 63, and/or 64 if eligible. Are we correct?”

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

A:  This is an excellent question and often a source of confusion in calculating the three-year catch-up, but before we answer, the Experts should provide a bit more background on the three-year catch-up election. As indicated in a prior Ask the Experts column, the three-year catch-up is an election that all 457(b) plan sponsors (governmental and private tax-exempt) MAY include in their 457(b) plans (it is NOT required), where a participant in each of the three calendar years prior to the normal retirement age (as specified in the plan) can contribute the lesser of:

  1. Twice the annual limit ($41,000 in 2022); or
  2. The basic annual limit ($20,500 in 2022) plus the amount of the basic limit not used in prior years.

Thus, if the participant has no unused limitation in prior years (i.e., he/she has always “maxed out” deferrals), the election will be no use, since limit #2 ($19,500 + $0 in unused limit) would always apply. That is why this is a “catch-up” election, as it allows you to catch-up on contributions that you did not make in prior years. The limit may only be used for one three-year period and cannot be used in addition to the age-50 catch-up that applies to governmental plans (private-tax exempt plans cannot use the age-50 catch-up).

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To answer your question, yes, the three-year catch-up is only available for the three calendar years prior to the calendar year in which the participant attains the plan’s normal retirement age. So, in your case, if the participant turns age 65 in 2022, the participant could not utilize the three-year catch-up election 2022. She could have only utilized it in 2019, 2020, and 2021. Thus, it is important to plan ahead for possible use of this election, if eligible.

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 3, 2022

Judge Rules in Home Depot’s Favor in ERISA Suit

Plaintiffs had alleged that Home Depot did not monitor their retirement plan offerings closely, and that they charged participants excessive fees that damaged their retirement accounts.

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A federal judge for the U.S. District Court for the Northern District of Georgia ruled in favor of The Home Depot, Inc. in an Employee Retirement Income Security Act lawsuit last Friday.

Plaintiffs Jaime Pizarro and Craig Smith had brought the class action lawsuit in April 2018. They alleged that Home Depot offered imprudent investment options for their retirement plans and failed to monitor their performance in violation of ERISA over a class period beginning in April 2012.

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Specifically, they alleged that the Home Depot plan had higher fees than similar plans. Some funds offered charged fees as high as 0.5%, when similar funds charged as low as 0.07%. The higher fees also bore no relation to the services rendered, argued the plaintiffs, because the fund advisor, Financial Engines Advisors, is a “robo advisor” offering “cookie cutter” plans and therefore had minimal operating costs. Plaintiffs also noted that even small fee differences can add up to a lot over the course of a participant’s life.

In September 2020, Home Depot’s co-defendants, Financial Engines, and its recordkeeper, Alight, were dismissed from the suit since they were not fiduciaries for the plan. The Home Depot motion to dismiss was denied. The judge ruled then that the plaintiffs had no specific evidence at this stage, but it could rely on circumstantial evidence of an imprudent selection and monitoring process since they were unaware of the process but it would be revealed in discovery.

Last December, the Chamber of Commerce filed an amicus brief to the court in support of Home Depot. The Chamber of Commerce often files amicus briefs in ERISA lawsuits on behalf of the fiduciary. The Chamber of Commerce  argued that plaintiffs cannot merely point to higher-performing funds after the fact as evidence of imprudence:

“ERISA does not subject fiduciaries to liability for selecting the alternatives they judged suitable for their individual plans at the time the decision was made, or for arriving at a conclusion different from what another fiduciary could have prudently made—not least when a fiduciary has elected objectively reasonable investments and services that are widely embraced by the fiduciaries of other similar plans.”

The judge in this case, Steven Grimberg, was once an uncompensated employee of the Chamber of Commerce’s Technology Litigation Advisory Committee from 2018 to 2019. The plaintiffs moved for his recusal on this basis, but Judge Grimberg declined. He noted that he was not paid for the work, and the committee he served on did not handle ERISA litigation.

On September 30, the judge ruled in Home Depot’s favor. The judge noted that Home Depot invested little in monitoring the investment options they provided. They did not do a survey of plan fees, nor engage in a competitive bidding process, and that Home Depot did not discuss the fees assessed by Financial Engines in their fiduciary meetings.

However, the plaintiffs did not prove that they actually suffered any loss by providing a fair comparison to the funds managed by Financial Engines on either fees or performance. The judge explained that “plaintiffs mistake competitors for comparators.”

In fact, said the judge, the fees paid by the plaintiffs were lower on a per-capita basis than the majority of other clients of Financial Engines, and that Financial Engines’ plans offered different “glide paths” or the investment adjustments made along the life of the participant, than other plans.

The judge ruled that even though Home Depot did not monitor its options closely, the plan they were still those that a prudent fiduciary would have kept, meaning the plaintiffs did not actually endure a legally actionable financial loss: “Regardless of any imprudent process, if a plan fiduciary selects an objectively prudent service or investment option, the plan has not suffered a loss, and the element of loss causation is wanting.”

Lastly, the judge ruled that even though some funds underperformed comparators briefly, keeping underperforming assets as part of a long-term strategy is not imprudent, and their underperformance in hindsight is not the basis for a claim since ERISA requires “prudence not prescience.”

Home Depot did not respond to a request for comment.

 

 

 

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