Compliance February 11, 2021

Washington Watchers See Good Prospects for Further Retirement Reforms

Among the potential retirement policy solutions that could become law in 2021 is a provision to allow 403(b) plans to access collective investment trusts, which can be beneficial for more than just their low fees.

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The National Association of Government Defined Contribution Administrators (NAGDCA) hosted a webinar Thursday afternoon to discuss the prospects of retirement security legislation passing during the newly installed 117th United States Congress.

The webinar opened with a video address given by Representative Jimmy Panetta, D-California, who spoke optimistically and favorably about the possibility of retirement reform legislation being the core piece of bipartisan cooperation over the next two years. Panetta praised the fact that the prior Congress was able to pass the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and he said there is already ongoing discussion among his colleagues about doing more in this area.

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“In the 117th Congress, we want to support retirement security once again,” Panetta said. “I am a big supporter of the Securing a Strong Retirement Act, or ‘SECURE 2.0,’ as it is referred to. It contains bipartisan legislation that I and others have been pushing for, including what I see as an important provision to allow 403(b) plans to invest in collective investment trusts [CITs]. It just doesn’t make sense anymore to limit the 403(b) plan community from investing in CITs. The costs savings from CITs could help deliver thousands of dollars in saved fees for teachers, administrators and those doing critical charity and community work.”

Panetta said he believes it is “very important and very possible” to work across the aisle on this matter.

“I know it feels like there is a lot of conflict between and within the parties,” he noted. “However, it is time for our nation to heal and work together. I’m confident that the Biden administration will join us and work hard in the spirit of bipartisanship, and I know retirement security can be a uniting issue.”

Following Panetta’s recorded address, an expert panel discussed in detail the issue of opening access to CITs for 403(b) plan sponsors and their participants. The speakers included Sandy Blair, director of retirement readiness at the California State Teachers’ Retirement System (CalSTRS); Angela Montez, general counsel and chief legal officer at ICMA-RC; and Aron Szapiro, head of policy research for Morningstar. The trio agreed wholeheartedly that allowing such plans to invest in CITs is a natural step forward for a sector of the retirement planning market that has long been accustomed to shifting rules and regulations.

“We have had very productive discussions with [Panetta] and his colleagues on this issue,” Blair said. “We engage with Congress regularly with our Capitol Hill visits, and this is something we’ve been discussing over the years. We are very pleased to see more members of Congress realize this issue and embrace the need to create legislation to address 403(b) plan access to CITs.”

Montez discussed how the CIT market has been developing for a long time.

“Though they had been around for decades prior, CITs became much more like mutual funds in the early 2000s, based on some important administration and transparency developments that allowed for daily valuation and easier analysis of holdings and performance,” Montez observed. “Today, at this stage, the operational barriers to using CITs have been eliminated, and so it is the right time to address the statutory barriers, and that is what this legislation would do.”

Szapiro echoed those points and highlighted the fact that CITs can deliver significant savings compared with mutual funds—even given the fact that mutual fund fees have fallen significantly in recent years.

“Yes, it is true that mutual funds have become less expensive, but CITs still have a sizable pricing advantage, and I would argue that mutual fund fees cannot fall much further, while CIT fees can, given their inherent efficiencies,” Szapiro said. “Our data shows that CITs are cheaper than comparable mutual funds 91% of the time. Compared to the least expensive share classes, CITs are still cheaper 82% of the time. Another important figure is that actively managed CIT strategies come in at about 60% of the price of a typical actively managed mutual fund strategy, on average. That is meaningful.”

Responding to an audience question, Szapiro said he has heard the argument that compressed mutual fund fees make the need to open up access to CITs less pressing, and, in a limited sense, he said that is true. However, he argued, there is more going on here than simple price comparisons.

“One important dynamic playing out is that many fund managers are launching some innovative and interesting target-date fund [TDF] strategies exclusively as CITs,” Szapiro said. “In fact, CITs have become a primary focal point for the investment industry. And, again, as more and more assets flow into CITs and as CITs grow bigger and bigger, there is no reason they can’t push their fees even lower, given the efficiency of the vehicle.”

Montez agreed with Szapiro, noting that CITs also offer potentially greater opportunities for customization based on the unique workforce characteristics of governments, schools and nonprofits. 

Blair concluded that, with the right congressional action, CITs could become an important tool for 403(b) plan sponsors, but that is not to say that CITs will be right for every plan or participant.

“Ultimately, this is about building choice and improving consistency across different plan types and employment sectors,” she said. “We must make sure governmental workers can have successful retirement outcomes, and that will be about each plan looking internally and doing an individual analysis of whether this will be something that complements and improves their investment lineup. Overall, I expect more and more sponsors will be looking at CITs as a cost-saving tool.”

Compliance February 11, 2021

Appellate Court Opens Door for New Complaint Against Georgetown

The appellate court found a lower court erred in denying the plaintiffs’ leave to amend their complaint, meaning the case over excessive fees in the university’s retirement plans may not be over.

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In a case alleging excessive fees in two Georgetown University retirement plans, the U.S. Court of Appeals for the District of Columbia Circuit has ordered a district court to reconsider the plaintiffs’ motion for leave to amend their complaint.

In January 2019, Judge Rosemary Collyer of the U.S. District Court for the District of Columbia ruled in favor of the university’s motion to dismiss the lawsuit’s claims, without prejudice. In a case dismissed without prejudice, the plaintiffs can file their claims again.

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However, in May 2019, Collyer ruled that the plaintiffs in the Georgetown case had filed their amended complaint two days too late under Federal Rules of Civil Procedure. The plaintiffs argued that a “final, appealable judgment” was not entered in January, or at any time since, so they filed their motion under Federal Rule of Civil Procedure 15(a).

The D.C. Circuit looked at whether the January dismissal order constituted a final judgment. “If it did, then this court lacks jurisdiction over the untimely appeal. If it did not, then this court has jurisdiction over the timely appeal, and the district court erred by relying on its January dismissal in rejecting appellants’ attempt to amend their complaint,” the appellate panel wrote in its decision.

The court said that, generally, a dismissal of a complaint without prejudice is not a final appealable order. As such, the complaint may be amended pursuant to Rule 15(a) of the Federal Rules of Civil Procedure without filing a motion pursuant to Rules 59(e) or 60(b). “This has long been the law in this and other circuits,” the court states.

However, it noted that even under its approach, there are well-defined circumstances in which a dismissal of a complaint without prejudice is a final appealable order.

For example, it says, in St. Marks Place Housing Co. v. U.S. Department of Housing & Urban Development, the district court’s order stated that the defendants’ motion to dismiss was granted and the case was closed, but that its order should “not be deemed a final order subject to appeal until the court has issued its memorandum opinion.” Once the opinion was issued more than two months later, the plaintiffs filed a notice of appeal. The D.C. Circuit held the appeal was timely because the district court did not issue its final decision until it issued its opinion.

The appellate court’s opinion lists several other examples where it was made clear a decision was final, but said, “None of the markers that this court has identified as sufficient indicia of such finality are present here. The district court did not state in either its January order or memorandum opinion that amendment of the complaint would be futile. The order did not state that it was final and appealable. The January memorandum opinion did not state that ‘the case’ or ‘the action’ was dismissed. Nor did the accompanying order state that it was dismissing all of the plaintiffs’ ‘claims.’”

The university maintains that the January order was a final decision triggering appellants’ time to file an appeal because it dismissed the complaint in full, leaving no claim unaddressed; the electronic docket entry for the order stated “this case is closed”; the January memorandum opinion expressed skepticism toward appellants’ overall theory; and the May memorandum opinion stated that the district court had dismissed the action in its January order, thereby disassociating itself from appellants’ case.

The appellate court cited a previous case in which it made clear that an order stating the complaint is dismissed in full is generally not, without more context, a final decision. “The fact that the January order addressed all portions of the complaint is therefore insufficient to make it final,” it said.

The court also noted that a court docket entry saying a case is closed does not always indicate that the district court has reached a final decision. “A case may be closed for administrative purposes even when the district court has not yet entered a final appealable order,” the D.C. Circuit’s decision states.

The court said the absence of an express reference by the district court to the possibility of a successful amendment to the complaint doesn’t provide clarity on the finality of its decision. “The district court never stated on the record that the action could not be saved by any amendment of the complaint which the plaintiff could reasonably be expected to make.”

While the district court said in its May memorandum opinion that the January order had “dismissed the complaint and the action,” and a separate order stated, “This case remains closed,” the appellate court noted that these occurred long after appellants’ time to note an appeal had expired. “Adopting the university’s position would mean that a nonfinal order can be rendered final by statements the district court makes months later, long after a party’s time to appeal has run,” the court said. “Such a result would be inconsistent with the Federal Rules of Procedure and judicial precedent seeking to ensure that litigants receive clear notice of when their time to appeal begins to run.”

The D.C. Circuit held that the January order was not final; only the May order was. The district court concluded in May that because judgment had been entered by the January order, appellants could no longer seek leave to amend their complaint, but the appellate court said that “because the January order did not enter a final, appealable judgment, the district court erred when considering appellants’ motion to amend their complaint in refusing to apply the Rule 15(a)(2) standard, rather than the more restrictive standards under Rules 59(e) and 60(b).”

The appellate court vacated the denial of appellants’ motion for leave to amend their complaint and remanded the case to the district court to consider whether to grant their motion, consistent with its findings.

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