Compliance November 8, 2012

High Court Lets Stand Presumption of Prudence Decisions

November 8, 2012 (PLANSPONSOR.com) – The Supreme Court declined to review two cases where plan sponsors were found to have a presumption of prudence related to company stock offerings.
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In Gray v. Citigroup Inc., the 2nd U.S. Circuit Court of Appeals found Citigroup fiduciaries did not abuse their discretion in continuing to offer company stock as an investment in two of its employee retirement plans (see “2nd Circuit Affirms Dismissal of Citigroup Stock Drop Charges”). The appellate court also held that defendants did not have an affirmative duty to disclose to plan participants nonpublic information regarding the expected performance of Citigroup stock, and that the complaint did not sufficiently allege that defendants, in their fiduciary capacities, made any knowing misstatements regarding Citigroup stock.    

The 2nd Circuit noted that many courts have recognized employee stock ownership plans (ESOPs), by definition, are “designed to invest primarily in qualifying employer securities.” The appellate court relied on the 3rd Circuit’s decision in Moench v. Robertson in saying that accordingly, Congress has encouraged ESOP creation by, for example, exempting ESOPs from ERISA’s “prudence requirement (only to the extent that it requires diversification)” and from the statute’s “strict prohibitions against dealing with a party in interest, and against self-dealing.”     

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In Gearren v. The McGraw-Hill Companies Inc., charges were dismissed in two consolidated stock drop cases against the McGraw-Hill Companies, also based on the presumption of prudence. Secretary of Labor Hilda Solis asked the 2nd U.S. Circuit Court of Appeals to reverse the decision.   

In a legal brief filed with the court, lawyers representing Solis attacked the Moench presumption saying the Employee Retirement Income Security Act (ERISA) does not carve out any exceptions to its mandates that fiduciaries act strictly with prudence and due care in carrying out their duties on behalf of participants and beneficiaries (see “Solis Argues for Stock Drop Case Law Change”).
Benefits November 8, 2012

Fidelity Average 401(k) Balance Reaches Highest Level

November 8, 2012 (PLANSPONSOR.com) – New data from Fidelity Investments indicates 401(k) participants are getting the message about saving more and diversifying.
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Fidelity’s analysis of its 12 million 401(k) accounts in more than 20,200 corporate defined contribution plans shows that average annual employee contributions grew 7.3% over the past five years to $5,900 at the end of the third quarter, up from $5,500 at the end of the third quarter 2007. Meanwhile, average annual employer contributions rose to $3,420 at the end of the third quarter, up 19% since the third quarter 2007 when it was $2,880.  

The average 401(k) balance reached $75,900 at the end of the third quarter, the highest it has been since the company began tracking the data more than 12 years ago.  

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For the 14th consecutive quarter, more participants increased their deferral rate than decreased it (4.6% vs. 2.8%). In addition, participant contributions continue to be allocated to more balanced investments, such as target-date funds (TDFs).

While new contributions into balanced options grew to 36% from 20% five years ago (34% specifically into TDFs, up from 15% five years prior), new contributions into equities decreased to 46% from 62%. Contributions into conservative options remained relatively flat at 18% over the five-year period.  

Fidelity noted that employer contributions are rising at faster rate than employees’ contributions. While plan design features such as auto-enrollment and auto-escalation have had a positive impact over the past five years, employers could use them more effectively to drive even stronger outcomes.   

During the third quarter, new participants who were auto-enrolled had an average deferral rate of 3.7%, while new participants in plans not utilizing auto-enrollment had an average deferral rate of 8.4%. This may be attributed to plans auto-enrolling participants at a too-low default deferral rate, such as the common 3%, Fidelity suggests. The company recommends plans adopt a 6% auto-enrollment default rate with an automatic escalation of 1% annually, up to 10%.

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