Compliance January 5, 2017

Claims in Excessive Fee Suit Against Prudential Tossed

A court found Prudential was not acting as a fiduciary and an employer’s 401(k) plan menu and use of an investment selection tool were appropriate.
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A federal judge has dismissed complaints against Prudential Retirement, an employer and its adviser in an excessive fee suit.

The participant who brought the proposed class action alleged that certain fees, including revenue-sharing payments, were kickbacks from mutual funds to Prudential. He also claimed that the 401(k) plan sponsored by Ferguson Enterprises included too many actively managed funds with higher fees than passively managed funds. Finally, he also accused a program offered by Prudential called GoalMaker, an optional program within the plan that assisted individual plan participants in making their investment selections, of directing participants to place their investments into higher-cost mutual funds that engaged in revenue-sharing with Prudential, resulting in additional compensation being paid to Prudential at the expense of the plan and plan participants.

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U.S. District Judge Victor A. Bolden of the U.S. District Court for the District of Connecticut first determined that Prudential was not a fiduciary with respect to the lawsuit’s allegations. Prudential did not have the contractual authority to delete or substitute mutual funds from its menu without first notifying Ferguson and ensuring its consent. In addition, Bolden found that the trust agreement strips Prudential of its discretionary authority over its own compensation, limiting Prudential‘s compensation to the fee schedule provided to the employer and requiring advance notice to the employer of any changes to the agreed-upon schedule.

Concerning Ferguson and CapFinancial (doing business as CAPTRUST), Bolden ruled that the plaintiff has not made any allegations directly addressing the methods used by Ferguson and CapFinancial to select investment options for the plan. And, the plaintiff makes no allegations that the funds in the plan underperformed, instead stating broadly that the concentration of mutual funds imposes unwanted expenses on plan participants without including any factual allegations regarding the availability of lower-cost alternatives.

NEXT: Attempt to move to zero revenue-sharing not compatible with ERISA

Bolden ruled that the Ferguson 401(k) plan ultimately offered a variety of investment options that included low-cost options, with expense ratios ranging from 0.04% to 1.02%. As of October 2014, the Ferguson Plan was offering sixteen total investment options, fourteen of which were mutual funds. Of these fourteen mutual funds, eleven were actively-managed and three were passively-managed. The Ferguson Plan did include several investment options that were made available to plan participants as alternatives to the higher-cost actively-managed mutual funds, including a Vanguard Institutional Index Fund, a Group Fixed Annuity option and a Prudential Stable Value option.

Regarding the GoalMaker product, Bolden found plan participants were provided with detailed information regarding the exact investments included within GoalMaker along with information pertaining to the fees involved with each of these investments. In addition, he noted it is undisputed that the GoalMaker program was optional for plan participants, and it did not offer any investment selections that were not already included in the broader menu of investment options.

Bolden added in his opinion that, in light of the legal insufficiencies discussed in connection with the plaintiff’s claims, further amendment of the amended complaint would be futile. At oral argument, plaintiffs described this case as part of a series of cases intended to move the entire industry… more and more to zero revenue sharing, based on the notion that zero revenue sharing is much less expensive for plans and for participants. Bolden said these goals, however worthwhile they may be, are not compatible with the purposes of the Employee Retirement Income Security Act (ERISA).

“While plaintiffs seek to transform the market itself by challenging the very framework of revenue sharing in this industry, ERISA protects plan participants‘ reasonable expectations in the context of the market that exists,” he wrote.

Compliance January 4, 2017

PBGC Issues RFI About Alternative Multiemployer Plan Withdrawal Liability Calculation

The agency wants to hear about issues involving a two-pool withdrawal liability method.
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The Pension Benefit Guaranty Corporation (PBGC) has issued a request for information (RFI) to inform the agency about issues arising from arrangements between employers and multiemployer plans involving an alternative “two-pool” withdrawal liability method.

The agency explains that there are four statutory methods for allocating unfunded vested benefits (UVBs) to withdrawing employers under the Employee Retirement Income Security Act (ERISA) section 4211. These methods generally allocate all of a plan’s UVBs (as determined under each method) among all employers participating in the plan, or among the employers who participated in the plan in the year the UVBs arose, based on the employer’s share of total contributions.

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An employer’s withdrawal liability is determined based on its allocable share of the plan’s UVBs under the plan’s allocation method, subject to adjustment. In addition to the statutory methods, ERISA section 4211(c)(5)(A) requires the PBGC to provide by regulation a procedure by which a plan may be amended to adopt an alternative method for allocating UVBs to employers that withdraw, subject to PBGC approval based on a determination that the method would not significantly increase the risk of loss to participants and beneficiaries or to the multiemployer insurance program.

In an effort to encourage new employers who may be reluctant to participate in multiemployer plans due to withdrawal liability, as well as current contributing employers who may be reluctant to continue, some plans have been exploring plan design changes to mitigate and manage withdrawal liability, the agency says.

One such plan design change is a “two-pool” alternative withdrawal liability arrangement. While there are significant variations in the form and substance of such arrangements, they all include a change to an alternative method for allocating UVBs under a plan, which requires PBGC approval under ERISA section 4211(c)(5).  If approved, the change essentially results in the creation of two separate withdrawal liability pools: a “new pool” of UVBs relating to the future liabilities of “new employers” and an “old pool” of UVBs relating to the past and future liabilities of “existing employers.” 

NEXT: Evaluating two-pool allocation methods is complex

For existing employers that transition to the new pool, withdrawal liability is assessed at then-current UVB levels and annual payment amounts. Any future increases in UVBs in the old pool and “unassessable” liabilities are allocated solely to, and payable by, the remaining employers in the old pool. In exchange for relief from future increases in withdrawal liability under the old pool, existing employers that transition to the new pool must generally pay, or begin to pay, their frozen old-pool withdrawal.

This, in turn may provide needed income to the plan and potentially extend plan solvency.

The PBGC approved some early requests for two-pool alternative allocation methods, but information regarding the terms of the settlements could have affected PBGC’s analysis of whether the statutory criteria had been satisfied. Thus, PBGC’s current practice is to request information on any proposed withdrawal liability settlement arrangements at the outset of PBGC’s analysis of the alternative allocation method approval request. The agency notes that evaluating the impact of a two-pool method on participants and beneficiaries and the multiemployer insurance program is a highly complex matter.

While it has gained considerable experience in analyzing several complicated two-pool alternative withdrawal liability requests over the last three years, the practice of adopting two-pool alternative withdrawal liability allocation methods and accompanying withdrawal liability payment arrangements is still evolving as plan sponsors become more aware of the sensitive balancing of risks and benefits among stakeholders. 

PBGC is requesting information from the general public and all interested stakeholders, including multiemployer plan participants and beneficiaries, organizations serving or representing retirees and other such individuals, multiemployer plan sponsors and professional advisers, contributing employers, unions, and other interested parties about these arrangements. It is particularly interested in learning about the terms and conditions that apply to new and existing contributing employers that enter into such arrangements. It also is asking for comments about specific questions.

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