Fiduciary Considerations Following Proposed Regulations Allowing Private Equity in 401(k)s

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by Alex Smith

The Department of Labor (DOL) recently issued proposed regulations intended to facilitate 401(k) participants’ access to alternative investments and provide a fiduciary safe harbor applicable to any type of investment option. The proposed regulations were issued in response to the President’s executive order last summer that directed the DOL and Securities and Exchange Commission (SEC) to facilitate 401(k) participants’ access to alternative investments, including private equity, cryptocurrency, real estate, commodities, and infrastructure financing.

The proposed regulations purport to provide plan fiduciaries with a safe harbor that presumes prudent action with respect to the selection of an investment alternative if they evaluate six non-exhaustive factors with respect to a potential designated investment alternative: (i) performance, (ii) fees, (iii) liquidity, (iv) valuation, (v) performance benchmarks, and (vi) complexity. However, the proposed regulations’ safe harbor may be illusory because it does not overrule relevant Supreme Court precedent. The Supreme Court has previously ruled that ERISA does not provide for a presumption of prudence in Fifth Third Bancorp v. Dudenhoeffer. Read more

I Hope You’re Happy Now … Coca Cola Top Hat Plan Lawsuit Highlights Importance of Careful Plan Drafting

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by Alex Smith

A recent decision by a Federal district judge in a lawsuit challenging a surviving spouse’s claim to survivor benefits under Coca Cola’s executive retirement plan, a nonqualified top hat plan, highlights the importance for careful attention to plan drafting and informal interpretations of the plan in communications with participants and potential beneficiaries. The deceased executive’s surviving spouse filed a lawsuit against Coca Cola seeking surviving spouse benefits under the top hat plan. Read more

Waste of Lime … Potential Dismissal of Pension Plan Lawsuit Emphasizes Importance of Participant Disclosures

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by Alex Smith

A recent decision by a Federal magistrate judge in a lawsuit challenging plan disclosures related to the conversion of a hospital’s pension plan from a traditional pension plan to cash balance plan highlights the importance for plan fiduciaries to provide participants with timely and accurate disclosures of plan changes. Participants filed a proposed class action lawsuit against Northwell Health in 2024 claiming that the disclosures they were provided about the conversion of the pension plan to a cash balance plan in 1999 failed to inform them that the change could substantially reduce participants’ benefits. The plaintiffs also alleged that the quarterly statements they were provided after the conversion did not accurately reflect their benefit without alleging a specific deficiency. Read more

‘Til You Can’t … What’s An Employer To Do When Court Gives 401(k) To Ex-Wife

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by Alex Smith

A recent decision by the Seventh Circuit highlights why employers may want to consider including a provision in their 401(k) plan that revokes a beneficiary designation to an ex-spouse if the plan does not already provide for it. The Seventh Circuit recently awarded the 401(k) account of a deceased Packaging Corporation of America employee to his ex-wife after the deceased employee unsuccessfully attempted to change his 401(k) beneficiary designation following his divorce.

The deceased employee previously designated his ex-wife as beneficiary and his sisters as contingent beneficiaries of his 401(k) account. He sent a fax to the company’s benefits center shortly after his divorce was finalized requesting to remove his ex-wife from his health, dental, and vision benefits and as beneficiary for his 401(k), pension, and life insurance. The fax also requested that any necessary paperwork be faxed to him. However, the employee never completed a new beneficiary designation form for the 401(k) plan. The ex-wife was removed from the health, dental, and vision benefits, but not as beneficiary from the 401(k). The employer filed an interpleader action in response to competing claims to the 401(k) account after the employee died a few months later. Read more

Welcome To The Future… Fiduciary Considerations as Recent 401(k) Lawsuit Challenges Proprietary Target Date Funds

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by Alex Smith

A recently filed proposed class action lawsuit against IBM’s 401(k) plan fiduciaries highlights the importance for 401(k) plan fiduciaries to carefully select and monitor 401(k) plan investment options, especially the plan’s target date fund. The lawsuit alleges that plan fiduciaries breached their fiduciary duties of prudence and loyalty by retaining several underperforming funds, including a suite of proprietary target-date and target-risk funds, and three Vanguard mutual funds. The lawsuit alleges that the underperforming funds cost plan participants $1.9 billion in returns compared to alternative funds, and the underperformance was obscured by the plan fiduciaries using custom benchmarks to monitor the proprietary target-date funds’ performance.  Read more

Some Beach … Fiduciary Considerations As Recordkeeper Sued For Misusing 401(k) Participant Data

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by Alex Smith

A proposed class action lawsuit filed against Empower last month highlights the importance for 401(k) plan fiduciaries to carefully negotiate their services agreements with recordkeepers and other services providers. The lawsuit alleges that Empower took advantage of its position as the 401(k) plans’ recordkeeper by sharing participants’ confidential financial data with an affiliate. The Empower affiliate then allegedly used questionable sales tactics to target participants with large account balances to pressure them into rolling over their funds to an investment platform with high fees and underwhelming returns. At this early stage, the court has yet to rule on the lawsuit and it is unknown whether the lawsuit has merit. Read more

I Might Be In Oklahoma But I’m Not OK … Fiduciary Considerations Following Executive Order Allowing Private Equity in 401(k)s

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by Alex Smith

Last week the White House issued an executive order directing the Department of Labor (DOL) and Securities and Exchange Commission (SEC) to facilitate 401(k) participants’ access to alternative investments, including private equity, cryptocurrency, real estate, commodities, and infrastructure financing. This direction includes the DOL reexamining guidance regarding fiduciary duties with respect to asset allocation funds, clarifying the DOL’s position regarding alternative assets and including them in asset allocation funds, and proposing related regulations and guidance. Read more

Truck on Fire … Supreme Court Relaxes ERISA Pleading Standards

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by Alex Smith

The Supreme Court recently issued a decision regarding the pleading standards for ERISA prohibited transactions claims in a case involving Cornell’s 403(b) plan to resolve a federal circuit court split. Under the Supreme Court’s decision, plaintiffs will only need to allege that the plan engaged in a prohibited transaction. The plaintiffs will not need to also allege the absence of a prohibited transaction exemption.

The Supreme Court’s decision could have far-reaching consequences because most transactions a retirement plan enters into with a service provider—such as a recordkeeper, investment advisor, or investment manager—constitute prohibited transactions with a party-in-interest (for which a prohibited transaction exemption typically applies). Plaintiffs may now be able to file lawsuits containing prohibited transaction claims capable of surviving motions to dismiss even though the allegations are meritless or frivolous. For example, the transaction subject to a claim may clearly fit within a prohibited transaction exemption, such as making reasonable arrangements for services for a reasonable price. This could be the case even if the plaintiff’s related ERISA breach of fiduciary duty claims that are part of the lawsuit are unable to survive a motion to dismiss. Read more

Every Little Thing … Employer Considerations as New 401(k) Lawsuit Includes Extensive Claims

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by Alex Smith

A recently filed lawsuit related to Swiss Re’s 401(k) plan stands out because of the extensive assortment of allegations. These allegations against Swiss Re, its 401(k) plan fiduciaries, and the plan’s recordkeeper include:

  • the plan paid excessive recordkeeping fees;
  • the plan’s investment options, including its target date funds, underperformed;
  • some of the plan’s investment options offered lower cost share classes than the share class available in the plan;
  • the plan failed to utilize the assets in the forfeiture account;
  • the plan’s recordkeeper misused participant data to market its Roth IRAs to participants; and
  • the plan’s fiduciaries failed to monitor the recordkeeper’s misuse of participant data.

Read more

Heads California, Tails Carolina… Employer Considerations Following Wave of 401(k) Forfeiture Lawsuits

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by Alex Smith

Over the past year, numerous employers and their 401(k) plan fiduciaries have faced lawsuits regarding how forfeited employer contributions to their 401(k) plan are utilized.  This wave of lawsuits began approximately a year ago when a plaintiff’s law firm filed putative class action lawsuits raising this novel claim against multiple large employers, including Intuit, Clorox, and Thermo Fisher Scientific in California federal courts.  Since then, this claim has been included in numerous 401(k) plan lawsuits even though none of these lawsuits have reached a final judgment on the merits and only five have had decisions on motions to dismiss.

These lawsuits allege that the employer and its 401(k) plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), by using forfeited employer contributions to the 401(k) plan to offset future employer contributions instead of using the forfeited amounts to offset 401(k) plan expenses that were charged to participant accounts.  The plaintiff’s counsel alleges that the employer and 401(k) plan fiduciaries are violating ERISA’s fiduciary requirements to make decisions for the benefit of plan participant because the employer benefits from a reduction in its future employer contributions at the expense of plan participants who have to pay for certain expenses that are charged to their 401(k) accounts. Read more