Compliance June 14, 2024

DOL Argues That Class Action Waivers in Plan Agreements Are Unenforceable

Most appeals courts have so far agreed with them.

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The Department of Labor filed an amicus brief to the U.S. 6th Circuit Court of Appeals in May which argued that a mandatory arbitration provision in a 401(k) plan document is unenforceable if it is tied to a class-action waiver.

The case in question is Tanika Parker et al. v. Tenneco, Inc., et al. First brought in April 2023, the suit alleges that Tenneco and its affiliates maintained a plan with excessive fees. Tenneco argued that the case should be sent to arbitration individually, per their plan documents.

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The district court disagreed, because the combination of mandatory arbitration and a class action waiver compels the participant to forfeit a statutory right, namely to secure plan-wide relief for fiduciary misconduct.

The defendants then appealed to the U.S. 6th Circuit Court of Appeals. The DOL filed an amicus brief for the case in December 2023 at the appeals court. The department argued that “the district court correctly refused to compel arbitration because the Arbitration Procedure includes a non-severable provision precluding Plaintiffs from obtaining in arbitration the very relief that ERISA expressly allows them to seek in court,” that being plan-wide remedies.

The DOL asked the court to uphold the ruling that “the Representative Action Waiver is unenforceable because it prevents the effective vindication of Plaintiffs’ statutory right to seek plan-wide relief.”

In May, DOL sent a supplementary amicus brief to the 6th Circuit. This was in reaction to a decision of the U.S. 2nd Circuit Court of Appeals, which ruled in another case, Cedeno v. Sasson, on May 1 that the class action waiver was unenforceable. The DOL wrote that the plaintiff’s “avenue for relief under ERISA is to seek a plan-wide remedy, and the specific terms of the arbitration agreement seek to prevent Cedeno from doing so,” which renders the agreement unenforceable.

The U.S. 3rd and 10th Circuit Courts of Appeal have also previously ruled this way in similar cases.

The Supreme Court in October 2023 declined to hear two cases concerning the enforceability of mandatory arbitration and class action waivers in plan documents. Those cases, from the 10th and 3rd Circuit Courts of Appeals, the defendants’ moves to force individual arbitration and prevent a class action remedy were denied.

Compliance June 14, 2024

PSNC 2024: I Survived an Audit

Hear about the experiences of plan sponsors that have been through IRS and DOL audits.

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Receiving a notice that your plan is under audit is unwelcome and scary, but plan sponsors who have experienced audits shared their insights, especially regarding the mechanisms sponsors can put in place to lessen the inconvenience and disruption.

For plan sponsors, readying for a Department of Labor or an IRS retirement plan audit means being prepared well beforehand, explained Linda Ressinger, manager for compensation, benefits and HRIS at the MacArthur Foundation, during the PLANSPONSOR National Conference, held in Chicago.

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Ressinger related her experience, following a phone call from regulators that informed her the plan would be audited.  

Experiencing a plan audit, “it’s every plan administrator’s worst nightmare,” Ressinger said. “You start thinking what did I do [wrong]? And what’s going to come out of this audit? Once that settled down, we did have a meeting with the chief legal counsel, [me] and his paralegal to figure out who we needed to include in the process, internally and externally.”

The sponsor proceeded to take proactive steps.

“For our internal stakeholders, we did set up a shared folder in our [Microsoft] OneDrive so that we could share all of the documents that were going to be, needed to be, looked at. We tried to figure out from the letter that we got what the scope of the audit was going to be,” Ressinger said.

In the MacArthur Foundation audit, regulators wanted their information on every active employee in 2020, Ressinger said. They wanted employees’ dates of birth, dates of hire, dates of termination, hours worked in the year, compensation amounts, eligibility dates to enroll in the retirement plan, dates they entered the plan, contribution totals for the year, and participant account information.

In 2023, “they were asking for information from 2020, so you have to have a system in place where you can go back and pull data,” she said.   

For plan sponsors, managing an audit successfully requires having the proper processes and mechanisms in place—to lower—sponsor’s fears and diminish what otherwise could be their first instinct, wanting to “Run!” said L. Rita Fiumara, senior retirement plan consultant at UBS Financial Services, whose two clients experienced audits in recent years.

Fiumara, relating her experiences collaborating with clients who have survived audits and persisted over the years noted regulators have “table stakes,” regarding documents plan sponsors must produce—at a moment’s notice, if asked. Included in the list of must-have papers are the plan’s summary plan description, investment policy statement, plan documents and plan amendments, Fiumara noted.

“Having that all neatly packaged [will help] so that you’re not scrambling [during an audit] and saying, ‘I don’t even remember the last time we sent out an SPD,’” Fiumara noted.

Chris Hunt, senior manager of retirement benefits at Fortune Brands Innovations Inc., agreed with Fiumara’s note that regulators executing an audit often seek certain “table stakes” documents.

Hunt noted plan sponsors must prepare to have at the ready their “summary plan documents, plan contracts [and plan] amendments not only that covered the plan year under audit, but typically for the year before and the year after,” he said.

Additionally, Fiumara outlined several of the critical “mechanisms that [plan sponsors] should put in place so when you do get audited, you are in a position of control, you’re in a position of being proactive and not reactive,” she said.

For plan sponsors, getting prepared to deal with an audit begins with scrutiny of plan committee structures, Fiumara noted.

“One of the very first things that we’ll do with our clients is we’ll sit down and we’ll say, ‘let’s understand who your committee is. Do you have a benefits committee that has both representation on the investment fiduciary side as well as the administrative side, or do you have a separate investment committee and a separate benefits committee?’” she said.

For plan sponsors, formalizing these rather than executing responsibilities informally will be helpful if an audit occurs, Fiumara added.  

Defined roles at the plan sponsors must be “articulated not only to the plan adviser, but more importantly to your recordkeeper [because] your recordkeeper really needs to know who the signers [of documents] are [at the plan] in terms of the signers that carry that responsibility of making decisions and signing off on amendments versus the ministerial duties [involved with running the plan],” explained Fiumara.

“The last thing you want is … [to experience] an IRS or DOL audit, and then your recordkeeper doesn’t have you on file as the go-to benefits administrator,” she cautioned.

The second “piece,” which Fiumara noted plan sponsors must have in place, is a “laundry list, almost like your checklist,” of retirement plan documents to have at the ready for regulators when and if the DOL or IRS call.

Preparing before the audit was crucial, said Ressinger. 

“Getting all of the [plan’s documents in one place] set up ahead of time and making sure everybody was on the same page was super helpful, so that we had a cooperative process through the audit,” she said. “Everybody knew what they were responsible for, and where all the documents would be.”

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