Compliance December 22, 2017

New EBSA Leader Preston Rutledge Takes Up Trump Agenda

Following news of Preston Rutledge’s approval by the full Senate to head the Employee Benefits Security Administration, several retirement industry advocacy groups voiced their support in short statements.

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The U.S. Department of Labor (DOL) now has a new head of the Employee Benefits Security Administration (EBSA) in Preston Rutledge—the former senior tax and benefits counsel on the Majority Tax Staff of the Senate Finance Committee, and top aide to Republican Senator Orrin Hatch.

As readers will likely know, the role of head of EBSA, formally called the “Assistant Secretary of Labor for the Employee Benefits Security Administration,” puts Rutledge at the helm of one of the lead regulatory bodies tasked with policing the tax-qualified retirement investing industry.

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It will take some time for Rutledge to really make an impact in the DOL and within EBSA, but his longstanding ties to the government, and particularly to a legislator known for being active on retirement and labor issues, have many in the retirement benefits industry looking cautiously forward to his tenure. Perhaps most importantly, Rutledge will now begin to play a lead role in determining what the Trump administration will ultimately do with the major Obama-era DOL fiduciary rule expansion.

While Rutledge’s approval to lead EBSA is a key development here, it still is difficult to forecast what the ultimate fate of the twice-delayed rulemaking might be. At this stage, industry observers can only look at the new EBSA head’s time spent working closely with Senator Hatch. Notably—with Hatch helping to lead the way—the Senate has recently voted to overturn Department of Labor separate Obama-era (DOL) rules that helped state and local governments set up retirement savings plans for private-sector workers who have no access to such plans.

Following news of Rutledge’s approval by the full Senate, several retirement industry advocacy groups voiced their support in short statements. One was the Insured Retirement Institute (IRI) Senior Vice President and General Counsel Lee Covington, who wrote to say his group was “pleased to see the Senate vote to confirm Preston Rutledge.”

“We are excited about the prospect and are looking forward to working with Preston to develop and put in place policies which will help to expand access to workplace retirement plans, increase retirement savings, and boost the utilization of lifetime income products,” Covington added.

Compliance December 22, 2017

ERISA Litigation Shows No Sign of Slowing in 2018

Proprietary fund lawsuits are viewed by plaintiffs’ firms as one of the types of excessive fee cases that are likely to get past motions to dismiss; and so it stands to reason that more—potentially many more—of these lawsuits are on the way.

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According to Nancy Ross, partner and head of the Employee Retirement Income Security Act (ERISA) litigation practice at Mayer Brown LLP in Chicago, the last year in litigation has seen a continued shift away employer stock drop cases in favor of excessive fee cases.

Ross notes that these excessive fee cases have started to divide themselves fairly neatly into a few different categories.

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“The most active sub-category is probably the lawsuits being filed against financial services providers regarding self-dealing within their own retirement plans,” Ross observes. “During 2017 we saw the district courts react in a fairly open manner to these allegations. Many of the cases, as we have discussed during the year, have avoided various preliminary motions to dismiss. As a result there are cases involving Franklin Templeton, Allianz, BBT, and Deutsche Bank, just to name a few, that will likely move ahead in 2018.”

According to Ross, these proprietary fund lawsuits are viewed by plaintiffs’ firms as “one of the types of excessive fee cases that are likely to get past motions to dismiss.” And so it stands to reason that more—potentially many more—of these lawsuits are on the way.

At a high level, Ross says trends in ERISA litigation tend to be driven by the financial environment.

“When you have a strong stock market, you see employers get attacked for having active management and paying excessive fees,” she explains. “But as the stock market inevitably weakens, you see claims about the failure to offer diversified and defensive lineup. So it’s tough to give employers general guidance about how to protect themselves.”

Ross expects some of the nearly two dozen lawsuits involving 403(b) plans that have emerged in the last several years will move ahead next year: “All but the lawsuit against Penn have escaped preliminary dismissal. The outcomes of these cases could send down some new guidelines on 403(b)s, particularly on the question of whether or not you should have multiple recordkeepers.”

Ross says she is also eager to see how the states’ efforts to offer their own retirement plans may run into ERISA preemption issues. In particular, she will be watching a lawsuit filed to halt the establishment of the Oregon Saves program, which is one of the state-run retirement programs for the private sector which has progressed furthest along. Something else that is important to watch in 2018, Ross says, is the “testing of remedies.”

“Across all of these cases there will be very important procedural issues that could be addressed, and there will be testing of remedies. By this I mean, there will be a testing of what appropriate relief for various allegations and outcomes might be,” Ross says. “If you look at the settlements and decisions that have come down in recent years, we’ve been all over the map in terms of the outcomes. Honestly I don’t know that we could reach anything like uniformity here.”

Ross’ overall assessment is that the litigation environment will indeed remain litigious next year. She says plan advisers and sponsors together are “trying really hard to manage risk in this environment. It’s like the game of Whack-a-Mole trying to manage all the different correlated risks. That’s the time we’re in right now.”

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