Compliance December 4, 2017

Senate Approves Own Version of Tax Reform Okayed By House

Each having passed their own version of the bill, the House and Senate now enter the conference committee phase, during which key legislators will attempt to craft a unified version of the Tax Cuts and Jobs Act.

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At nearly 2 a.m. on Saturday morning, the GOP leadership in the U.S. Senate called for a vote on the Tax Cuts and Jobs Act; with another version previously passed by the U.S. House of Representatives, the success of the proposal in the Senate pushes the tax reform effort into the crucial conference committee phase.

Washington watchers will be familiar with the mechanics of a conference committee: A select group of highly placed legislators will meet in the coming weeks to try to combine and otherwise edit the House and Senate bill texts into a single common form. Should House and Senate GOP leaders successfully craft a joint version of the Tax Cuts and Jobs Act that meets their respective demands, the full House and Senate will then be given the chance to vote on the final bill, which could subsequently be submitted for the president’s signature.

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At this stage, it still somewhat difficult to predict the final form any new tax laws could take, experts agree. In fact, many of them are still digesting the hundreds of pages of legislative text comprising the dueling proposals, and they remain wary of making strong predictions given the real potential for substantial amendments.

A few things seem clear so far, including that retirement plans are largely left alone by both bills. By way of background, both the preliminary versions of the House and Senate  proposals would have made major changes to the treatment of deferred compensation for executives and highly paid employees. However, following the earliest stages of debate, both the House and the Senate backed away from the proposed changes to deferred compensation arrangements, as well as from other retirement-industry focused proposals. For example, the initial House and Senate bills both were amended to strike new limitations of catch-up contributions for high-wage employees, and to eliminate a proposal to implement a 10% penalty tax for early withdrawals made prior to age 59½ from governmental section 457(b) plans.

Given that many retirement plan sponsors are also business owners, the industry will be closely watching how the conference committee treats “pass through taxes.” Speaking broadly, under current law such income is taxed at the regular personal income tax rate per the amount of income drawn in a given year. As laid out in some early comparative analysis shared by the Heritage Foundation, the House bill as passed caps the maximum tax rate for pass-through income at 25%, “subject to special rules that effectively raise the tax rate.” On the Senate side, deductions are “allowed for 23% of qualifying pass-through income, but no other preferential rate is set.” Where the common ground may be on this issue and others, again, remains to be seen.

Offering some preliminary commentary on the forthcoming conference process, which Congressional leaders hope to wrap and deliver to taxpayers by Christmas, David Musto, president of independent retirement and college savings services provider Ascensus, says he seems some positive and negative aspects for the retirement plan industry and its clients.

“It is important to acknowledge the many unknowns remaining in this process,” he observes. “While both versions of the bill tout tax cuts, the question remains, will more disposable income lead to more savings across the board?”

Musto feels both the House and Senate bills respect the importance of tax-advantaged retirement plans to the wealth generation of average Americans.

“While both bills have some provisions seeking to simplify use of retirement plans, greater access to plan assets via hardship distributions and broadened options for in-service withdrawals may increase the use of assets for non-retirement purposes,” he warns.

Being in the business of servicing 529 plans, Musto is naturally encouraged by provisions included in the Senate bill to promote tax-advantaged college savings to meet elementary and secondary school tuition. Also included in the Senate bill is the ability to roll 529 assets into ABLE programs for disabled savers.

Among his concerns is the Senate’s choice versus the House to eliminate the Affordable Care Act’s so-called individual health insurance mandate via tax reform. This could place a larger financial burden on consumers without health coverage, he fears.

Compliance December 4, 2017

Union Fund Hit With Excessive Fee Suit

Similar to many excessive fee lawsuits filed against single-employer plans, the complaint accuses a multiemployer plan of failing to leverage its bargaining power to obtain lower investment and recordkeeping fees.

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Featuring a familiar set of allegations, an excessive fee lawsuit seeking class certification has been filed against the Board of Trustees of the Supplemental Income 401(k) Plan, a multiemployer plan for union members.

Plaintiffs—participants in the plan via their employment with San Bernardino Steel—allege that the board of trustees and its individual members breached their fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act (ERISA) by offering retail class mutual fund shares when identical lower cost institutional class shares were available; and by overpaying for recordkeeping by paying the plan recordkeeper, John Hancock Retirement Plan Services and its predecessor, New York Life Insurance Company, excessive fees through revenue-sharing arrangements with the mutual funds offered as investment options under the plan.

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According to the complaint, the plan offers 21 investment options; 20 mutual funds and a stable value fund. The board selects the plan’s investment options. The complaint included a chart that compared the expenses for Class A shares of funds offered in the plan to Class I shares of the same funds. For example, the plan offered Class A shares of the Fidelity Advisor Freedom 2010 fund, with an expense ratio of 0.78%, when Class I shares, with an expense ratio of 0.53%, were available.

In 2016, the board replaced the Retail Class Fidelity Advisor Freedom target-date funds with JPMorgan SmartRetirement target-date funds; however, the complaint says, the board once again chose Retail Class A shares in the JPMorgan SmartRetirement target-date funds instead of the lower cost institutional Class R-6 shares available to qualified employer retirement plans.

As seen in many excessive fee suits against single-employer plans, the complaint says the defendants failed to use the plan’s bargaining power to leverage lower-cost mutual fund options for the plaintiffs. In addition, it says the defendants had no adequate annual review or other process in place to fulfill their continuing obligation to monitor plan investments, or, in the alternative, failed to follow the processes. The lawsuit contends that the total amount of excess mutual fund expenses paid by the class over the past six years exceeds $10 million.

As a result of the defendants’ improper choice of mutual fund share classes, the plan paid unreasonable fees to its recordkeeper John Hancock, according to the complaint. As an example, the lawsuit notes that the Columbia Small Cap Value Fund II charged operating expenses of 1.27% annually to plan participants who invested in the fund. The fund then paid John Hancock 0.50% in Rule 12b-1 and shareholder service fees. Had the defendants offered Y Class shares of the Columbia fund, which pays no Rule 12b-1 fees, plan participants would have paid 0.42% less in operating expenses, John Hancock would have received 0.42% less from the mutual fund, and the participants’ return on investment would have increased by 0.42%.

The lawsuit accuses the defendants of failing to use the plan’s bargaining power to leverage John Hancock to charge lower recordkeeping fees for plan participants. In addition, it says the defendants failed to take any or adequate action to monitor, evaluate or reduce John Hancock’s fees.

“Because revenue-sharing arrangements pay recordkeepers asset-based fees, prudent fiduciaries monitor the total amount of revenue-sharing a recordkeeper receives to ensure that the recordkeeper is not receiving unreasonable compensation. A prudent fiduciary ensures that the recordkeeper rebates to the plan all revenue-sharing payments that exceed a reasonable per participant recordkeeping fee that can be obtained from the recordkeeping market through competitive bids,” the complaint says. “Because revenue-sharing payments are asset based, they bear no relation to the actual cost to provide services or the number of plan participants and can result in payment of unreasonable recordkeeping fees.”

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