Nevin & Fred

The United States Supreme Court is set to examine an issuethat could dramatically impact the future of ERISA litigation.  Ahead of that, Nevin (Adams) and Fred (Reish) look at the issues – and potential impact(s).

The Issue

The case - Anderson v. Intel - is about what a participant must allege to get an ERISA investment prudence claim past a motion to dismiss.  More specifically, the question presented is: Whether, for claims predicated on fund underperformance,pleading that an ERISA fiduciary failed to use the requisite "care, skill, prudence, or diligence" under the circumstances and thus breached ERISA's duty of prudence when investing plan assets requires alleging a "meaningful benchmark.”

Said another way, when a participant says an investment’sunderperformance suggests the fiduciaries acted imprudently, does the complaint have to identify a genuinely comparable investment to get past a motion to dismiss? The Court is weighing how to prevent hindsight comparisons fromstanding in for evidence of a flawed decision, while allowing a claim based on other facts that plausibly point to imprudence.

NOTE: It is not deciding whether Intel’s use of private equity and hedge funds was prudent.

Some Background

After the 2008 financial crisis, Intel changed the investment mix in its custom target-date and global diversified funds, adding hedge funds and private equity. Intel said – and communicated to participants – that the strategy was intended to reduce volatility and protect against largelosses in downturns, while acknowledging that it could lag funds with heavier stock allocations during rising markets. Former employee Winston Anderson challenged the strategy, alleging that the funds’ performance and costs, amongother facts, supported an inference that the fiduciaries had acted imprudently. He also alleged that investments benefited Intel’s venture-capital arm.

What’s at Issue

In essence, Anderson argues that courts must assess allthe allegations together: unusual allocations, alleged risks and costs, and performance evidence may collectively support an inference of imprudence even without a closely matched comparator. Intel responds that if relativeunderperformance is the basis for inferring a flawed process, the comparison must be meaningful; otherwise, a fund could look deficient simply because it pursued a different objective.

The Labor Department and most retirement industry trade groups have weighed in supporting Intel’s position.  Meanwhile, participant advocate groups – and formerLabor Department officials are backing the position of theparticipant-plaintiff.

Why is the Supreme Court Considering the Issue?

Intel has prevailed at both the district court and appellatecourt levels on the issue.  But different federal court districts have taken different positions on the requirement toassert a meaningful benchmark at the motion to dismiss stage.  The Seventh, Eighth, Ninth and Tenth havesupported that requirement, though the Sixth Circuit has taken a somewhat different stance.  However, the disagreement is chiefly about claims that infer imprudence from relative performance or cost, not whether every ERISA prudence complaint needs a benchmark.

And note - the proposed Investment Selection Rule uses the same phrase for a different purpose. Its paragraph (k) would require a fiduciary selecting a designated investment alternative to identify a “meaningful benchmark” and compare the alternative’s risk-adjusted expected returns, net of fees, with it. However, the proposal defines that benchmark broadly: it could be an investment, strategy, index, or other comparator with similar mandates, strategies, objectives, and risks. 

The PPA didn't invent automatic enrollment, target-datefunds, or professional investment management. But it was arguably a transformative shift in the design of workplaceretirement plans – and the focus of those who support them.

Signed into law on August 17, 2006, the Pension ProtectionAct:

•       Tightened pension funding rules (pension “protection,” after all),

•       Created automatic enrollment safe harbor, including auto escalation,

•       Directed development of qualified default investment alternatives (QDIAs),

•       Made key EGTRRA provisions permanent (higher contribution limits, catch-up contributions, Roth 401(k)).

The bigger change was philosophical.  The PPA gave us a plan design template architected to leverage participant behavior towards better outcomes.  Not so much an “if you build it, they will come” presumption, as a “let us do it for you” acknowledgement.

In this episode, Nevin (Adams) and Fred (Reish) recap someof the impacts – and how the PPA transformed the very essence of retirement planning in the U.S.

Episode Resources

Talking Points: 20 Years Later, Did the PPA Really Change Everything?

The Pension Protection Act: This Changes Everything | PLANSPONSOR

The Impact of PPA on Retirement Savings for 401(k) Participants

What can plan sponsors (and advisors) learn from litigation?  As it turns out, a lot – even if you aren’t responsible for a billion-dollar plan.

There are, of course, things to be learned from litigation.  We’ve learned that the plaintiffs’ bar doesn’t (always) knowhow to calculate fees (they rely on Form 5500), doesn’t know how to calculate performance, and doesn’t appreciate important distinctions in target-date fund glidepaths.  Though some do, of course. 

But the lessons drawn from litigation can serve as a reminder that fiduciaries should never assume, and never take anything for granted. 

Particularly not only what the law allows, but what the plandocument permits.

In a special edition of the Nevin & Fred podcast (or, if you prefer, a special edition of Prime Capital’s The Reish Brief), Nevin (Adams) and Fred (Reish) cover a wide range of topics with plenty of lessons to learn. 

We’re talking about things like:

1. Annual Beneficiary Checkups: Treat beneficiary designations like milk in the fridge—check them at least annually (and after marriage/divorce), because tiny “paperwork sins” like using 33⅓% instead of whole numbers can void the change and send everyone to court.

2. Zombie Beneficiary Cleanup: Don’t let auto-enrollment create “beneficiary-less zombies” in your plan; track thepercentage of participants missing designations and run a recurring campaign to get them completed before a claim turns into a family feud.

3. Documented Prudence Wins: Win lawsuits the boring way: hold regular (often quarterly) committee meetings, usean IPS that guides without handcuffing you, hire qualified advisors, keep written reports, and document why you kept or replaced investments—because ERISA wants prudence, not psychic powers.

4. Defensible Glidepath Choices: Target-date funds can be sued for being too conservative when markets soar and too aggressive when markets tank, so pick a glidepath based onworkforce demographics/industry realities and communicate the “why” to participants like Intel did.

5. Forfeiture Compliance Trap: Forfeitures are the new litigation piñata: confirm your plan is using forfeitures exactlyas the document says today, and prepare for upcoming restatements that may force you to hardwire a specific forfeiture-use method instead of “we’ll decide later.”

That’s right – all that – and more!

Episode Resources:

Court Says Call Center Communication Didn't Change Beneficiary Designation.

Appellate Court Backs Beneficiary Designation

Beneficiary Disclosures Trigger Fiduciary Breach Suit, Appeal

Season 4 Episode 2 "Glidepaths and 'Guide' Paths” | Nevin & Fred % %

Season 5 Episode 7: Nevin & Fred – Has the Forfeiture Tide Turned? | Nevin & Fred % %

Last August  President Trump signed an executive order directing the Secretary of Labor to, among other things, “reexamine the Department of Labor’s guidance on a fiduciary’s duties regarding alternative asset investments in ERISA-governed 401(k) and other defined-contribution plans” – a stance widely seen as encouraging the consideration of alternative assets in defined contribution plans, including401(k)s and 403(b)s.

Then on March 30, the Labor Department issued a proposedregulation in response to that directive, titled “Fiduciary Duties In Selecting Designated Investment Alternatives.” 

However, while it acknowledged that while the executiveorder “focused on fiduciary responsibilities for offering an asset allocation fund that includes investments in alternative assets, the proposed regulation would apply to the selection of any type of investment as a designated investment alternative, including investments in so-called “alternative assets.”

That said, the comment period closed with more than 47,000comments!

In this episode, Nevin and Fred consider the…alternatives…and the future of the proposal.

Episode Resources:

Regulations.gov(the comments)

DOL Archives - Fred Reish

Season 6 Episode 4: The Investment Selection Proposal | Nevin & Fred % %

Talking Points: Retirement Income, Defaults and Fiduciary Duty

Special Edition: Fiduciary Duties In Selecting Designated Investment Alternatives Proposed Rule  https://endeavor- retirement.activehosted.com/index.php?action=social&chash=f770b62bc8f42a0b66751fe636fc6eb0.467&s=f1b8e69fc34995b9d807df36b7a3c6f3

AGs, Congressional Democrats Say DOL Proposal Weakens Prudence Standard

EBSA’s Aronowitz Outlines Fiduciary Framework for ‘Investment Selection Rule’

How Many Times Does the DOL Proposed Rule Mention ‘Litigation?’

Fiduciary Duties in Selecting Designated Investment Alternatives (the “Investment Selection Rule”)

Breaking News: Trump Signs EO to Advance Private Market Investments in 401(k)s

On March 30, the Employee Benefit Security Administration(EBSA) published its much-anticipated response to President Trump’s Executive Order on Alternative Investments. What, if anything, does it mean?

In this episode Nevin (Adams) and Fred (Reish) look at theproposal—what it says (and doesn’t), the six factors to be considered—and one that isn’t—the process ahead, and its implications for plan fiduciaries.

Last August  President Trump signed an executive order directing the Secretary of Labor to, among other things, “reexamine the Department of Labor’s guidance on a fiduciary’s duties regarding alternative asset investments in ERISA-governed 401(k) and other defined-contribution plans” —a stance widely seen as encouraging the consideration of alternative assets in defined contribution plans, including401(k)s and 403(b)s.

In response, on March 30 the Labor Department issued aproposed regulation to that directive, titled “Fiduciary Duties In Selecting Designated Investment Alternatives.” However, it acknowledges that while the executive order “focused on fiduciary responsibilities for offering an asset allocation fund that includes investments in alternative assets, the proposed regulation would apply to the selection of any type of investment as a designated investment alternative,including investments in so-called “alternative assets.”

The Investment Selection proposal also has a lot to say about ERISA litigation. In fact, the word is used over 100 times in the release, including 26 footnotes and multiple section headers.

Episode Resources:

Special Edition: Fiduciary Duties In Selecting Designated Investment Alternatives Proposed Rule  https://endeavor-retirement.activehosted.com/index.php?action=social&chash=f770b62bc8f42a0b66751fe636fc6eb0.467&s=f1b8e69fc34995b9d807df36b7a3c6f3

EBSA’s Aronowitz Outlines Fiduciary Framework for ‘Investment Selection Rule’

How Many Times Does the DOL Proposed Rule Mention ‘Litigation?’

Fiduciary Duties in Selecting Designated Investment Alternatives (the “Investment Selection Rule”)

Breaking News: Trump Signs EO to Advance Private Market Investments in 401(k)s

On March 12, Judge Jeremy D. Kernodle in the US DistrictCourt for the Eastern District of Texas approved a motion to vacate the Retirement Security Rule. What does that mean for retirement security?

The motion to vacate – essentially waving a judicial wand tomake it as though the regulation never existed – was unopposed by the Department of Labor.

But what does that mean for retirement plan advisors – andretirement plan advice?  Is the 5-part rule still in force?  Whatabout PTE 2020-02?  And what about rollovers?

Nevin (Adams) and Fred (Reish) discuss and debate the “new”fiduciary landscape.

Episode Resources

RIP Fiduciary Rule: Judge Officially Strikes Down DOL Regulation

Trump Administration Moves to Drop Defense of Fiduciary Rule

Breaking! Department of Labor Releases Final Investment Advice Fiduciary Rule

Fact Sheet: Retirement Security Rule and Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries | U.S. Department of Labor

On February 3, Nevin (Adams) and Fred (Reish) met with a very special group of third-party administrators. Recorded live at the SoFi Center (home of TGL, Tomorrow’s Golf League), the podcasting pair dealt with some of the most timely and critical issues confronting retirement plan professionals at the Definiti-sponsored event. 

In Part 1, we covered:

3(16)

Pooled Employer Plans (PEPs)

But in Part 2, we pivot to:

Crytpocurrency

Artificial Intelligence

Episode Resources:

Cybersecurity | U.S. Department of Labor

Tips for Hiring a Service Provider with Strong Cybersecurity Practices | U.S. Department of Labor

Settlement Struck in Consulting Actuarial Firm Data Hack

Court (Again) Rebuffs Amended Data Breach Suit

U.S. Department of Labor. “Artificial Intelligence and Worker Well-being: Principles for Developers and Employers.” Accessed August 13, 2024. In Web Archive, archived August 13, 2024. https://web.archive.org/web/20240813173652/https:/www.dol.gov/general/ai-principles  

Compass: Navigating AI in Retirement Plan Administration

Top 10 Questions for Plan Committees - October Compass 10 Things [Vertical]

Data and Security: The Current Frontier https://www.napa-net.org/news/2021/6/data-and-security-current-frontier/

On February 3, Nevin (Adams) and Fred (Reish) met with avery special group of third-party administrators at an event sponsored by Definiti.

Recorded live at the SoFi Center (home of TGL, Tomorrow’sGolf League), the podcasting pair dealt with some of the most timely and critical issues confronting retirement plan professionals at the Definiti-sponsored event. 

We’re talking things like:

3(16)

Pooled Employer Plans (PEPs)

Cryptocurrency

Artificial Intelligence

Episode Resources:

Things I Worry About (26): Pooled Employer Plans and DOL RFI (7) - Fred Reish

Understanding MEPs, PEPs, and PPPs: Key Insights and Resources

How PEPs Have Flourished Since Their Creation

Talking Points: A PEP-spective on Fiduciary Reviews

Winter Issue of Plan Consultant Is Now Online!

More Advisors Turning to 3(16) Fiduciary Outsourcing

Can Employers Outsource Administrative Fiduciary Responsibility?

‘Tis the season for “best of,” “most,” and of course, “naughty and nice” list making.  In this episode Nevin (Adams) and Fred (Reish) share theirs with regard to retirement plans.

In that holiday classic “Santa Claus is Coming to Town,”Santa is said to be “making a list and checking it twice…” all with the purpose of finding out “who’s naughty and nice.” Well, in this special holiday-inspired episode, Nevin and Fred share their lists.  So, who/what is going to wind up with a lump of coal in their stocking?

Here are our lists:

Naughty 

1. Surveys that promote bogus data to generate business for themselves.  Scare techniques generally, including by those who use surveys and studies to do that.

2. Frivolous lawsuits - given multiple chances to make their claim(s) - the forfeiture suits primarily (note:  some of that comes from apparent conflicts in the laws and regulations…for example, the IRS says that using forfeitures to offset contributions is possible, but the DOL says that, if left to discretion, it is a fiduciary duty that must be in the best interest of participants.

3. Social Security looming shortfalls left unaddressed - and everyone says it won't be a problem.  

4. The lack of any integrated fiduciary/institutional answer to retirement income. Although the steps taken, e.g., the SECURE Act, are “nice.”

5. The complexity of the laws governing qualified plans, especially when it comes to small employers.

Nice

1. Signs that people are saving more and better. Evidence in PSCA, Vanguard and Fidelity surveys.  The very low costs of saving through 401(k) plans as compared to retail (andpartially the plaintiffs’ attorneys who have contributed to that).

2. DOL backing plan fiduciaries on the forfeiture reallocation suit.  

3. More personalized target-date funds/managed accounts.

4. Pooled Employer plans (though keep an eye on themarketing and administration of these programs down the road).

5. Mandatory automatic enrollment for new 401(k) and 403(b) plans.

6. Retirement issues continue to be a bipartisan issue mostly). 

Episode Resources:

Misleading headlines/surveys

Talking Points: Third Time No Charm in ‘Forgotten Account’ Fantasy

Talking Points: IRA ‘Junk’ Bunk

No 'Magic' in These 401(k) Retirement Numbers

Talking Points: A Red Flag for a ‘Red Flag’ Report).

Social Security

'Nothing' Doing About Social Security?

Forfeiture Stuff

DOL Backs HP in Forfeiture Reallocation Suit Appeal

SECURE 2.0 and Retirement Income

SECURE Act and Guaranteed Income (Part 3) - Fred Reish

6 Obstacles to Retirement Income Adoption

PEPs

Nevin & Fred: Could a Predominant PEPs Prediction Prove Positive?

Automatic Enrollment

The SECURE Act 2.0: The Most Impactful Provisions (#1–Automatic Plans) - Fred Reish

The SECURE Act 2.0: The Most Impactful Provisions #13 — Starter 401(k) Plans and Safe Harbor 403(b) Plans - Fred Reish

Things I Worry About (6): Automatic Enrollment (5) and PEPs - Fred Reish 

Plan sponsors have a lot to do – and a lot to do withhelping Americans prepare for retirement – and a lot of things that help them do so.  In this episode, Nevin (Adams) and Fred (Reish) share their lists of things plan sponsors should be thankful for this holiday.

There’s obviously a LOT to be thankful for, not the least ofwhich is that plan sponsors are often doing what they do for retirement planning in the midst of an array of other pressing concerns. 

That said, there have been any number of innovations andevolutions over the years – and as we come to that time of the year when we’re inclined to give thanks – well, here are our lists:

- The 401(k) - how was America going to retire without it?

- ERISA 404(c) -participant directed investments safe harbor (without it, plan fiduciaries are responsible for ALL participant investment decisions (even the dumb ones)

- EGTRRA (Economic Growth Tax Relief and Recovery Act of 2001) - which, among other things, lifted the harsh contribution limits of TRA86, gave us Roth option.

- Target-date funds – making it easier for participants to benefit from professional money management.

- PPA (Pension Protection Act of 2006) – which “sanctioned” (via safe harbors) automatic enrollment and qualified default investment alternatives (QDIA) – including the afore-mentioned target-date funds.  Created FLOORS, not ceilings for retirement savings.

- Index funds – helping provide a cost-effective investment structure, first via various share classes, and now via collective investment trusts.

-  SECURE 2.0 (the SECURE 2.0 Act of 2022) – which provided 90+ OPTIONS for improved retirement savings that plan sponsors can choose from (or not).    Lots of options in SECURE 2.0 that are OPTIONAL.

-  The plaintiffs’ bar – well, some of them anyway.

-  ERISA’s preemption provision – one set of federal laws that trump various state rules and regulations, and give us a single set of (admittedly complex) federal rules.

And one more – but you’ll have to listen to find out!

Happy Thanksgiving!

-         Nevin E. Adams, JD