Administration March 30, 2020

Plan Sponsors Facing Difficult Decisions During Coronavirus Pandemic

Stopping employer matching contributions, laying off employees, adjusting DB plan contributions; plan sponsors need to understand the effects of each decision.

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Employers are facing difficult decisions as a result of the economic impact of the coronavirus outbreak, including decisions about their retirement plans.

Loreen Gilbert, president of WealthWise Financial in Irvine, California, has already fielded many calls from retirement plan sponsors, as well as participants. For example, some plan sponsors already have decided to suspend their 401(k) matching contributions.

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Gilbert explains that if a plan’s document says the match is discretionary, plan sponsors can decide whether or not to contribute a match and that makes the decision to suspend the match simpler. In this case, plan sponsors can suspend their match right away.

However, with safe harbor 401(k) or 403(b) plans, plan sponsors must give a 30-day notice to plan participants that the match will be suspended, and the plan sponsor cannot start to suspend the match until after the 30 days.

In an Insights article from Cammack Retirement, Michael A. Webb, a vice president based in New York City, explains that safe harbor plans generally can suspend or reduce employer contributions if the safe harbor notice specifically stated that this action could be taken, or if the employer is operating at an economic loss in the current plan year. Safe harbor plans require a certain match formula to be used or a qualified nonelective contribution to be made in order for plan sponsors to avoid nondiscrimination testing. If these contributions are reduced or suspended, plan sponsors will be subject to this testing.

Gilbert says whether the plan is a safe harbor plan or not, participants must be notified of any change to matching contributions. She also notes that whether the plan document has to be amended depends on the language in the plan document; if there is a specific match formula in the plan document, it will have to be amended by the end of the plan year.

Plan Terminations

Gilbert says she has not yet received any calls from plan sponsors who are considering terminating their defined contribution (DC) plans; however, one client that was preparing to adopt a safe harbor plan is reconsidering. “They don’t know if they want to commit to a safe harbor plan, and that was only plan type that made sense for them so the owners could contribute,” she says.

Though no client has called about terminating its retirement plan altogether, Gilbert notes that one small business client had 35 employees but had to lay off 15—43% of the workforce. Even though the client plans to rehire the employees back when the economy recovers and is encouraging employees not to touch their retirement plan assets, this could trigger a partial plan termination.

Attorneys with Morgan, Lewis & Bockius LLP explain in a blog post that, according to IRS guidance, a partial termination is presumed to occur when more than 20% of plan participants are terminated in a particular year. Once a partial termination is triggered, affected participants must be 100% vested in benefits accrued as of the partial termination date. This is true for partial terminations of DC as well as defined benefit (DB) plans.

The blog post also notes that, for DB plans, when a plan sponsor maintaining a single employer DB plan closes a facility and as a result incurs a workforce reduction of 15% or more of its employees who are eligible to participate in a qualified retirement plan, including a 401(k) plan, it triggers what is called a “substantial cessation of operations.” The employer may be subject to withdrawal liability and notice rules that otherwise only apply to multiple employer plans.

Other Considerations

Gilbert describes how another business owner client had just bought a business building but was still paying his lease on the old building, so he is making double payments. Now, his entertainment business is faltering because of the coronavirus pandemic. She explains that he is trying to reduce his overhead to make it through the year and now doesn’t have the cash flow he needs to make a contribution to his DB plan for employees.

DB plan sponsors must make an annual required contribution (ARC) based on actuarial figures regarding projected liabilities. Some plan sponsors may have to get creative in determining how they will fund this. Gilbert’s client has been making contributions above the ARC each year based on projections to reach plan goals—and to get a tax deduction. He may not be able to do so this year.

Gilbert says clients are considering freezing their DB plans because it is currently the time frame in 2020 in which they can make this decision. Others are considering a change to the formula for benefit accruals. Both decisions will require plan amendments and notices sent to plan participants.

In the normal course of both DC and DB plan administration, required notices must be sent to participants. During this time when employees may be working remotely or many have been terminated, laid off or furloughed, getting those notices to participants may be more difficult. Plan sponsors can work with their plan providers to make sure notices are being delivered.

Finally, Gilbert says, “We are getting more phone calls from participants than I’ve seen since 2008.” She suggests the market drop related to the coronavirus pandemic should spur plan sponsors to take another look at the investment options they make available to participants. For example, how have asset allocation vehicles, such as target-date funds (TDFs) fared?

“A year ago, we looked at all TDFs to see which were best positioned for the next downturn. The Department of Labor [DOL] considers that an important consideration,” she says. “We looked at TDF strategies and their pros and cons, so we were in a good position with TDFs.”

Compliance March 30, 2020

Fiduciary Failures Affirmed in Fidelity Self-Dealing Challenge

A new district court ruling finds Fidelity liable for certain fiduciary breaches in the operation of its own retirement plan, but the decision ‘addresses only the question of liability, not causation or loss.’

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The U.S. District Court for the District of Massachusetts has ruled in an Employee Retirement Income Security Act (ERISA) lawsuit filed against various business units of Fidelity and alleging impermissible self-dealing and imprudence.

The complex decision rules in part for and against the fiduciary defendants and does not resolve some of the important matters at hand. As the decision explains, there “remains a live issue as to whether Fidelity’s statute of limitations defense is viable.” As such, the ruling focuses on answering important threshold questions as to whether Fidelity’s actions in the operations of its retirement plan violated ERISA—thereby establishing liability but not causation or loss.

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In the underlying lawsuit, the certified class of plaintiffs alleges that the Fidelity defendants breached their ERISA fiduciary duties of prudence and loyalty by permitting self-dealing to occur in the retirement plan offered to Fidelity’s own employees. According to the complaint, the defendants “loaded the plan exclusively with Fidelity-affiliated investments, without investigating whether plan participants would have been better served by investments managed by unaffiliated companies.”

The lawsuit says that, among some 20 peer defined contribution (DC) plans with more than $5 billion in assets for which necessary data is available, Fidelity’s plan performed the worst—almost three times worse than average. According to the plaintiffs, this underperformance represents more than $100 million per year in losses compared with the average plan.

For its part, Fidelity asserts as an affirmative defense that all of the plaintiffs’ charges are not only barred by a prior court-approved class action settlement but are also time-barred. Additionally, Fidelity argues that it has not violated any fiduciary duties as matter of law, and that any underperformance experienced by the plan is not the result of imprudence or disloyalty.

A Mixed Ruling

Having heard the arguments of both sides, the court ruled that, on count one, Fidelity has breached its duty of prudence by failing to monitor its mutual fund investments and by failing to monitor/control recordkeeping expenses. Fidelity, however, has not breached its duty of prudence by failing to investigate alternatives to those mutual funds because a prudent fiduciary would not be required to conduct those specific investigations.

“Fidelity additionally has not breached its duty of loyalty,” the ruling states. “On count three, Fidelity has not engaged in prohibited transactions because its dealings with proprietary products were no less favorable to the plan as a whole than to other shareholders of Fidelity funds. Counts four and five are both derivative of counts one and three.”

Regarding count four, the ruling states that one defendant (FMR LLC) is liable for the breach of its duty to monitor the plan fiduciaries “with regards to their ongoing handling of the mutual fund investments and recordkeeping expenses.” On count five, the decisions rules that plaintiffs “may recover from Fidelity entities for any profits traceable to the aforementioned breach of the fiduciary duty to monitor.”

“At trial, the plaintiffs will bear the burden of proving the extent of any losses, and Fidelity will bear the burden of proving that any losses to the plan were not caused by the lack of monitoring,” the ruling concludes. The ruling goes on to state that there “remains a live issue” as to whether Fidelity’s statute of limitations defense is viable.

“Additionally, this decision addresses only the question of liability, not causation or loss,” the ruling emphasizes.

A ‘Case Stated’ Ruling

As a “case stated” ruling, the structure of this new decision deserves its own short analysis. Indeed, the decision takes time to spell out its unique structure and to clarify what are essentially partial determinations.

“While the summary judgment motions were sub judice [under a judge], the parties proposed that the court resolve some—but not all—of the issues as a ‘case stated,’” the ruling explains. “Case stated hearings provide an efficacious procedural alternative to cross motions for summary judgment.”

In a case stated decision, the parties waive trial and present the case to the court on the undisputed facts in the pre-trial record. The court is then entitled to engage in a certain amount of fact finding, “including the drawing of inferences.”

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