Compliance August 24, 2020

Parties in Lawsuit Over Revenue Sharing in 401(k) Plan Agree to Settle

BTG International and company officials agreed to pay $560,000 to settle charges they allowed the plan’s recordkeeper to receive unreasonable compensation through undisclosed channels.

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Parties in a lawsuit alleging BTG International and company officials allowed its Profit Sharing 401(k) Plan recordkeeper to receive excessive and unreasonable compensation through a variety of undisclosed channels have filed a motion for preliminary approval of a settlement agreement.

Under the settlement agreement, “without any admission or concession on the part of the defendants as to the merits” of the lawsuit, the named defendants have agreed to pay $560,000.

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The complaint stated that “since the plan is a group annuity 401(k) product, defendants offered only investment options primarily offered by John Hancock to the exclusion of all other options.” According to the complaint, during the class period, of the plan’s more than 100 investment options, 53 of them “appear to be managed by John Hancock, with the remainder paying revenue sharing to John Hancock.”

The complaint argued that plan fiduciaries have limited their selection of funds to only those funds which provide sufficient revenue sharing, thus foregoing superior investment alternatives and selecting or maintaining inferior investment options based upon revenue-sharing relationships.

The plaintiff alleged that the defendants did nothing “to limit or curtail John Hancock’s growing compensation, rather, John Hancock was allowed to generate ever higher fees despite costs which were either stable or falling.” The lawsuit said this failure “cost the plan millions of dollars in excessive fees charged directly by John Hancock or collected by John Hancock from the plan’s investment options through revenue sharing.”

The plaintiff also accused the defendants of failing to accurately disclose the fees John Hancock received on Form 5500 filings with the Department of Labor (DOL) each year from 2012 to the present.

Compliance August 24, 2020

DOL to Hold Hearing on Investment Advice Proposed Rule

The DOL said it received several requests for a hearing during the comment period and commenters expressed interest in its proposed ERISA prohibited transaction exemption.

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The Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) will hold a public hearing to consider issues related to adopting a proposed prohibited transaction exemption (PTE) as part of its proposed rule on improving investment advice for workers and retirees.

The proposed rule would create a new exemption for investment advice fiduciaries as defined and policed under the Employee Retirement Income Security Act (ERISA). The proposed exemption offers a new prohibited transaction class exemption for investment advice fiduciaries and is based on an existing temporary policy adopted after the 5th Circuit Court of Appeals vacated the DOL’s previous 2016 fiduciary rule package.

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If finalized as proposed, the exemption would allow investment advice fiduciaries to give more choices for retirement clients using so-called “impartial conduct standards.” According to the DOL leadership, these impartial conduct standards rise to the level of “a best interest standard.” This is to say that they require reasonable compensation and that financial professionals make no materially misleading statements.

As part of this proposal, the department is also taking the ministerial action of amending the Code of Federal Regulations to implement the 5th Circuit’s order. As the DOL explains, the court’s order had the effect of reinstating the department’s 1975 regulation defining who is an investment advice fiduciary under ERISA and the Internal Revenue Code (IRC), commonly known as the “five-part test.” The court’s order also had the effect of reinstating the department’s Interpretive Bulletin 96-1 regarding participant investment education.

The end of the comment period for the proposed rule revealed that some parties argue the fiduciary proposal is being rushed, while others broadly support the DOL’s aim to align its regulations with the Securities and Exchange Commission (SEC).

The hearing will be held on September 3 and (if necessary) September 4, beginning at 9 a.m. EDT. Due to the COVID-19 pandemic, the hearing will be held virtually.

The DOL said testimony will be limited to individuals or parties who submitted a comment or hearing request on the proposed exemption before the close of the comment period. Requests to testify at the hearing on the proposed exemption should be submitted to the DOL on or before August 28. Text of the Notice of Hearing, which will be published in the Federal Register on August 25, is here.

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