Fiduciary Issues

The Department of Labor’s final rule titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, which was previously announced, has been published in the Federal Register. Today’s publication establishes a January 30, 2023, effective date. Certain provisions related to proxy voting, however, will not be applicable until December 1, 2023.

The U.S. District Court for the Eastern District of Pennsylvania has dismissed an ERISA fiduciary lawsuit against electronics manufacturer, Ricoh USA. The plaintiffs had claimed that the employer breached its fiduciary duty to a 401(k) plan it sponsors when it selected the plan’s recordkeeper. As evidence, the plaintiffs pointed to a dozen recordkeepers offering similar services at lower costs than what the fiduciaries selected for the plan. The court dismissed the lawsuit because it found that the plaintiffs did not provide enough detail in their complaint about the lower-cost competitor services to demonstrate that those services were actually comparable to those the plan employed. The court said in the absence of this detail, it was unable to determine whether the comparison between the plan’s service provider and the competitors is actually an “apples to oranges” comparison rather than an “apples to apples” comparison. The plaintiffs were given an opportunity to amend their complaint to address this issue.

The Department of Labor (DOL) has announced the release of a final rule to remove barriers in considering environmental, social, and governance (ESG) factors in plan investments. 

The DOL emphasizes in the executive summary that the final rule does not change two longstanding principles. First, the final rule retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan. Second, the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights relative to those shares, including the right to vote proxies. The final rule makes several other changes that are highlighted in the summary.

• Amends the current regulation to delete the “pecuniary/non-pecuniary” terminology based on concerns that the terminology causes confusion and a chilling effect to financially beneficial choices.
• Confirms that a fiduciary may include as part of a risk and return analysis the economic effects of ESG on a particular investment determination or course of action.
• Amends the current regulation to remove the stricter rules for QDIAs, such that, under the final rule, the same standards apply to QDIAs as to investments in general.
• Amends the current regulation’s “tiebreaker” test to provide that when a fiduciary concludes prudently that competing investments, or competing investment courses of action, equally serve the financial interests of the plan over the appropriate time horizon—the fiduciary is not prohibited from selecting the investment or investment course of action based on collateral benefits other than investment returns.
• Adds a new provision clarifying that fiduciaries do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans.
• Eliminates the statement in paragraph (e)(2)(ii) of the current regulation that “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right”, as it may be misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal.
• Removes two “safe harbor” examples for proxy voting policies permissible under paragraphs (e)(3)(i)(A) and (B) of the current regulation. The DOL believed that these examples encouraged abstention as the normal course and failed to recognize the importance that prudent management of shareholder rights can have in enhancing the value of plan assets or protecting plan assets from risk.
• Modifies requirements in order to more generally cover monitoring obligations, and address concerns that could be read as requiring obligations above and beyond the statutory duties of prudence and loyalty that generally apply to monitoring the work of service provider.
• Amends to eliminate from paragraph (e)(2)(ii)(E) of the current regulation a specific requirement on maintaining records on proxy voting activities and other exercises of shareholder rights, due to perception of treating proxy voting and other exercises of shareholder rights as carrying a greater fiduciary obligation than other fiduciary activities.

The final rule is effective 60 days after publication in the federal register.

On November 11, 2022, Juniper Networks, a computer hardware manufacturer, agreed to settle a lawsuit by participants in a 401(k) plan it sponsors for $3 million. The lawsuit alleged that the plan offers managed account services which provide almost no value to the participants but came with a large fee. The plaintiffs contended that the fee of 65 basis points was more than triple what participants paid in similar-sized plans. They also argued that the services should have been a flat rate as the work required to offer the service does not increase as the account assets increase. This was one of many similar lawsuits filed against large plan sponsors where the plaintiffs were represented by the law firm of Walcheske & Luzi in the past two years.

The Pension Benefit Guarantee Corporation has updated the ERISA Section 4044 Mortality Table to now include factors for 2023 valuation dates. This mortality table is used to determine the present value of annuities in involuntary terminations and distress terminations of single-employer plans. The web page also includes updates to a unisex version of the table that is used in determining benefit transfer amounts under the missing participant program in accordance with ERISA Section 4050. 

A final rule titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights submitted by the Department of Labor has left the Office of Management and Budget.

The final rule is pursuant in part to Executive Order 14030, which directed the Secretary of Labor to suspend, revise or rescind previous guidance on this matter promulgated during the Trump administration. A proposed rule was published in the Federal Register on October 14, 2021.

Participants in a 401(k) plan sponsored by The Massachusetts Mutual Life Insurance Company (MassMutual) have sued the sponsor for breach of fiduciary duty to the plan. The plaintiffs claim that by offering MassMutual’s own proprietary funds for the plan, the sponsor put its own interest ahead of plan participants. They argue that almost no similarly sized plan sponsors offer those funds, and that there were identical investments with cheaper share classes available that the sponsor should have selected instead.

They also argue that the sponsor improperly retained Empower as the recordkeeper. MassMutual had been a recordkeeper and conducted all recordkeeping for the plan in house. It sold its recordkeeping business to Empower effective Jan. 1, 2021.

After the sale, the sponsor elected to hire Empower as the recordkeeper, and kept it in that position until May 2022, when it hired a less expensive recordkeeper. The plaintiffs contend that MassMutual improperly offered Empower the right to serve as recordkeeper of the plan as an inducement to the sale.

The Pension Benefit Guaranty Corporation (PBGC) is extending the comment period for a proposed rule that would provide interest rate assumptions that may be used by a plan actuary in determining a withdrawing employer’s liability under a multiemployer plan. PBGC published the proposed rule in the Federal Register on October 14, 2022, with a comment period that was scheduled to end on November 14, 2022. After receiving a request to extend the comment period to provide a total of at least 60 days from October 14, 2022, PBGC is extending the comment period through December 13, 2022. Release of the proposed rule was previously announced.

The Securities and Exchange Commission (SEC) has released a proposed rule titled “Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting.”

The Pension Benefit Guarantee Corporation (PBGC) has submitted to the Office of Management and Budget an information collection request and extension related to Form 5500 series annual reporting requirements. Specifically, the request proposes modifications to Schedule R, Retirement Plan Information, and Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information.