Compliance October 10, 2022

Quanta Services Sued in ERISA Lawsuit

The energy company was sued by two former employees for keeping poorly performing options on its retirement fund menu.

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Two former employees of Quanta Services in late September brought a class action suit against the company under the Employee Retirement Income Security Act, alleging that Quanta had maintained underperforming and expensive investment options in its sponsored retirement plan.

Quanta Services, an electrical power company, sponsored a retirement plan that covered 16,317 participants, with $1.21 billion in assets as of December 21, 2020, according to the lawsuit.

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The lawsuit alleges that a plan of this size should have greater bargaining power to negotiate lower fees. The plan, however, kept high-cost and underperforming actively managed funds when better alternatives were available, such as passive index funds, according to the plaintiffs.

The suit preempts a common argument made by defendants in ERISA cases that the funds maintained by a sponsor cannot be fairly compared to higher-performing competitors because “competitors are not comparators.”

To address this “apples and oranges” problem, the lawsuit alleges that the point of actively managed funds is to outperform index funds in order to justify their higher cost. Their reason for existence is comparative: to grow faster than passive funds and justify their higher management cost. This makes them ripe for comparison, the lawsuit alleges, and their inclusion in a plan when better passive funds are available violates the fiduciary’s duty of prudence and duty to monitor on behalf of participants.

The plan sponsor did not compare active fund to index plans, however, and also kept an active target date fund as the plan’s “Qualified Default Investment Alternative” or QDIA. A QDIA is a default investment that a plan may offer as a recommendation to participants that lack the knowledge or confidence to select their own, and their assets would be invested in the QDIA if they do not select a fund themselves.

The plaintiffs allege that an active TDF should not have been the QDIA, since active funds typically underperform passive funds in the long run. To this end, the plaintiffs cited data showing that passive funds gained $40 billion in net inflows from 2016 to 2020, and active funds  suffered $35 billion in net outflows over the same time period, reflecting a collective market endorsement of passive over active, according to the complaint. They also allege that actively managed funds tend to contain more high-risk assets such as high-yield bonds.

Specifically, the suit noted the American Beacon Small Cap Value Fund and the DFA International Small Cap Value Fund, both of which, according to the complaint, underperformed their own benchmarks for several consecutive quarters. Since Quanta did not remove these funds in a timely manner, it failed its duty to prudently monitor their retirement options, costing the plaintiffs and the class money in their total savings.

Active funds are not considered a per se violation of ERISA.

Quanta Services did not return a request for comment.

Compliance October 10, 2022

IRS Issues Update on 10-Year RMD Rule

The updated guidance waives the excise tax for those who failed to take a required minimum distribution in 2021 and 2022.

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The IRS has issued Notice 2022-53, providing guidance on final regulations related to required minimum distributions under section 401(a)(9) of the Internal Revenue Code that will apply no earlier than the 2023 distribution calendar year. The notice also provides guidance related to certain provisions of section 401(a)(9) that apply for 2021 and 2022.

The guidance for certain RMDs for 2021 and 2022 state that a DC plan that failed to make a specified RMD will not be treated as having failed to satisfy Internal Revenue Code section 401(a)(9) because it did not make that distribution. Additionally, for taxpayers who did not take a specified RMD, the IRS will not assert an excise tax under IRC section 4974. “If a taxpayer has already paid an excise tax for a missed RMD in 2021 that constitutes a specified RMD, that taxpayer may request a refund of that excise tax,” the notice states.

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According to the IRS, the notice addresses “specified RMDs,” defined as any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to section 401(a)(9) in 2021 or 2022 under a defined contribution plan or IRA that is subject to the rules of 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

  • a designated beneficiary of an employee under the plan (or IRA owner) if the employee (or IRA owner) died in 2020 or 2021 and on or after the employee’s (or IRA owner’s) required beginning date, and the designated beneficiary is not taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii); or
  • a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to section 401(b)(5) of the SECURE Act) if the eligible designated beneficiary died in 2020 or 2021, and that eligible designated beneficiary was taking lifetime or life expectancy payments pursuant to section 401(a)(9)(B)(iii) of the code.

The notices states that the final regulations regarding RMDs under section 401(a)(9) of the code and related provisions will apply no earlier than the 2023 distribution calendar year.

Background

Section 401(a)(9) provides rules for RMDs from a qualified plan during the life and after the death of the employee, the notice states. The rules provide a required beginning date for distributions and identify the period over which the employee’s entire interest must be distributed.

Under the old rules, the entire interest of an employee in a qualified plan must be distributed, beginning no later than the employee’s required beginning date, over the life of the employee or over the lives of the employee and a designated beneficiary (or over a period not extending beyond the life expectancy of the employee and a designated beneficiary).

If the employee dies after distributions have begun, the employee’s remaining interest must be distributed at least as rapidly as under the distribution method used by the employee as of the date of the employee’s death, the notice states. If the employee dies before RMDs have begun, the employee’s interest must either be distributed within five years after the death of the employee (five-year rule) or distributed over the life or life expectancy of the designated beneficiary with the distributions beginning no later than one year after the date of the employee’s death—with certain exceptions.

This code has been amended by the SECURE Act, extending the five-year time period to 10 years, which applies regardless of whether the employee dies before the required beginning date, the notice states. Additionally, the exception to the 10-year rule, under which the rule is treated as satisfied if distributions are paid over the designated beneficiary’s lifetime or life expectancy, applies only if the designated beneficiary is an eligible designated beneficiary.

The new rules also state that when an eligible designated beneficiary dies before that individual’s portion of the employee’s interest in the plan has been distributed, the beneficiary of the eligible designated beneficiary will be subject to a requirement that the remainder of that individual’s portion be distributed within 10 years of the eligible designated beneficiary’s death.

When a minor child reaches the age of majority, that child will no longer be considered an eligible designated beneficiary and the remainder of that child’s portion of the employee’s interest in the plan must be distributed within 10 years of that date, the notice states.

These amendments to the code apply to distributions of employees who die after December 31, 2019, though later effective dates apply for certain collectively bargained plans and governmental plans, the release states. The rules do not apply to payments associated with certain annuity contracts under which payments began before December 20, 2019.

If an employee who participated in a plan died before IRC section 401(a)(9)(H) became effective, and the employee’s designated beneficiary died after that effective date, then that designated beneficiary is treated as an eligible designated beneficiary and the new rule applies to any beneficiary of that designated beneficiary.

If the amount distributed during the taxable year of a payee under any qualified retirement plan or any eligible DC plan is less than that taxable year’s minimum required distribution, then an excise tax is imposed on the payee equal to 50% of the amount by which the minimum required distribution for the taxable year exceeds the amount actually distributed in that taxable year.

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