Ask the Experts July 18, 2023

Can Participants Access Annuities if They Are Not Offered by the Plan?

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

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Q: I read with great interest your Ask the Experts column on the difference between investment in an annuity and an annuity distribution from a 403(b) plan. We are a relatively new church plan sponsor that does not offer annuities at all in our 403(b) plan, either as investment options or as a form of distribution. Since we do not offer annuities in-plan, can our participants still avail themselves of an annuity option in retirement if they wish? Or are they out of luck?

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

A: Your plan participants can absolutely avail themselves of an annuity option in retirement, but instead of purchasing that annuity in the plan, they would purchase an annuity outside of the plan. There is a strong retail market for annuities, and participants will generally have a variety of options from which to choose. Though such retail annuities may be more expensive than an annuity purchased in-plan due to a plan’s collective purchasing power, the annuity might be more easily tailored to the individual needs of a participant.

There are generally two ways of purchasing an annuity outside of the plan: by rolling over an eligible rollover distribution to an IRA or other retirement plan that offers annuities as an investment option, or by taking a plan distribution and using the proceeds from that distribution to purchase an annuity benefit. Since annuities can be complicated, and not everyone is a good candidate for an annuity, the Experts urge anyone considering an annuity option to discuss the issue with a financial adviser well-versed in such vehicles.  

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.

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Compliance July 17, 2023

DOL Secures $124 Million Settlement on Behalf of DST Systems Participants

DST Systems Inc. was accused of mismanaging its profit-sharing 401(k) plan and failing to diversify the plan’s assets, which resulted in large losses, according to the settlement.

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Fiduciaries of a retirement plan sponsored by DST Systems Inc., including New York City-based investment management firm Ruane, Cunniff & Goldfarb Inc., will pay more than $124.6 million to resolve violations of federal law due to their failure to manage the profit-sharing portion of their plan properly, according to the Department of Labor.

In October 2019, the DOL filed one of several lawsuits alleging the mismanagement of investments in the DST Systems Inc. 401(k) Profit Sharing Plan.

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The DOL suit alleged that DST Systems’ fiduciaries violated the Employee Retirement Income Security Act by “failing to diversify the plan’s assets to minimize the risk of large losses and failing to act prudently and loyally in managing these assets when the investment manager invested the plan’s assets on a highly concentrated basis in a select number of securities.”

DST Systems is an information processing software and service provider based in Kansas City, Missouri, and was acquired by SS&C Technologies Holdings Inc. of Windsor, Connecticut. The company hired Ruane, Cunniff & Goldfarb & Co. to serve as an investment adviser to the plan.

The complaint challenged DST Systems’ investment in Valeant Pharmaceuticals International Inc. stock, which grew to more than 45% of the plan’s assets. Soon after, Valeant’s stock fell dramatically in 2015, following a fraud scandal.

According to the DOL, participants experienced significant losses to their retirement savings because of the plan’s concentrated portfolio. The participants who originally sued DST Systems Inc.’s profit-sharing and 401(k) plans alleged that the losses were well in excess of $100 million.

An investigation by the department’s Employee Benefits Security Administration identified ERISA violations and found that Ruane, Cunniff & Goldfarb controlled 100% of the investments of the profit-sharing portion of the plan. EBSA also found that DST Systems and individual defendants failed to monitor the investment manager’s activities properly.

Since the complaint was filed in 2019, Ruane, Cunniff & Goldfarb has taken steps to limit the investment concentrations of other ERISA-covered plans it manages, according to the DOL.

The settlement agreement was filed on July 14. In 2019, when the DOL’s case was filed, the plan had 9,233 participants and $1.2 billion in assets, according to its Form 5500 for the 2019 plan year.

“This resolution protects the rights and benefits of the plan’s participants and shows that we will aggressively pursue appropriate legal action to ensure those rights and benefits,” said Solicitor of Labor Seema Nanda in a press release. “Fiduciaries to retirement plans must comply with the Employee Retirement Income Security Act’s safeguards—including diversification—to protect workers’ retirement benefits and fulfill their own fiduciary responsibilities.”

Assistant Secretary for Employee Benefits Security Lisa Gomez also stated in the release, that: “This settlement restores hard-earned retirement funds for more than 9,000 participants in DST Systems’ retirement plan. The U.S. Department of Labor is determined to investigate and seek remedies for potential violations of the Employee Retirement Income Security Act.”

SS&C Technologies Holdings Inc. did not immediately respond to a request for comment.

DST Systems Inc. is represented by lawyers from Paul, Weiss, Rifkind, Wharton & Garrison LLP. Attorneys for the government include Michael R. Hartman and Amy Tai of the U.S. Department of Labor.

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