Statutory, Regulatory, and Litigation Developments Keeping ERISA Attorneys Busy

Fiduciaries will need to be on their toes over the next few months. As we continue to await additional SECURE 2.0 guidance from the Internal Revenue Service (IRS), the wheels of change remain in motion. This month, QPA’s team of ERISA Attorneys is devoting additional energy to ensuring plan fiduciaries remain educated about recent developments and what might arise in the near future.

ERISA Attorney Talk. Plan sponsors face a number of decisions, options, and requirements over the next several months. July’s ERISA Attorney Talk will take a closer look at several of those items, including:

  • SECURE 2.0: What changes do you need to discuss now? How does your recordkeeper impact what options you’ll have? Will lobbying groups be successful in requesting delayed effective dates for one or more provisions?
  • Form 5500 and Audit Requirements: The IRS has announced a relaxed standard for counting plan participants, which may protect some plans from the annual audit and full Form 5500 requirement. Might your plan(s) be in a position to benefit from the relaxed standard? If so, are there steps your organization should take before the end of the year?
  • Plan Loans and Corrections: These are messy. Thankfully, corrections are easier now than they’ve ever been. But it’s important to know what is and is not permissible.
  • “Decumulation” and Lifetime Income: Are your employees prepared to make their retirement savings last? To what degree has your organization begun to consider alternatives for helping with that need? Are you having the right conversations about your options?

Litigation Developments Continue. The ERISA Attorney Talk webinar will also address “recent litigation in a nutshell”, with an eye toward helping plan fiduciaries to understand what the last couple years of litigation activity means to plans of all sizes. In advance of that discussion, we want to address a recently filed lawsuit reflecting that the plaintiffs bar continues to learn from court opinions and to adapt its strategies accordingly. The filing of a lawsuit does not necessarily mean a court will find claims valid or that the defendants will face any corresponding liability. But in the aftermath of the Supreme Court’s Hughes v. Northwestern opinion, lower courts continue to carve out a pleading and argument roadmap that is likely to serve plaintiffs well.

Zimmerman v. Cedars-Sinai Medical Center. On June 13, 2023, a class of plan participants filed suit against the employer, committee, and 10 board or committee members (in their individual capacities) overseeing a 403(b) plan with over 16,000 participants and more than $2 billion in plan assets. The filing included fairly typical allegations that the fiduciaries had breached their responsibilities by overpaying the plan’s recordkeeper, relying on revenue sharing from high-cost share classes, retaining and offering poorly performing funds, and failing to benchmark the recordkeeper expenses and expense structure.

The plaintiffs worded many of those allegations in the same manner they would have a couple years ago, before the Supreme Court decided Hughes. But the plaintiffs demonstrated that they understand the new roadmap by advancing the following arguments that should catch other fiduciaries’ attention:

  1. Fee Structure: The complaint leans heavily on allegations that recordkeeping expenses should be assessed as a flat per participant amount instead of as an asset-based fee. It notes that the asset-based fee allowed the recordkeeper’s revenue to increase from $1.35 million in 2020 to $1.7 million in 2021, despite the number of participants remaining largely flat. It also includes data from the preceding three years reflecting that the recordkeeper’s annual revenue had doubled over a five-year period, despite the number of participants increasing by only 18%.
  2. Value of Services: The complaint emphasizes that the plan “did not receive any unique services or at a level of quality that would warrant fees far greater than the competitive fees that would be offered by other providers”. This line of reasoning is a direct result of courts instructing that it’s not enough to allege services are expensive; courts have rejected participants’ excessive fee claims when they fail to also allege that there was no additional value corresponding to the additional cost.
  3. Revenue Sharing: Finally, the complaint presented a chart reflecting the excessive fees paid as a result of the failure to use less expensive share classes. It also offered a potential rationale for the fiduciaries’ willingness to use more expensive share classes: “The use of expensive share classes was likely motivated by an improper desire to hide fees from Plan participants by using revenue sharing . . . .”

The defendants will undoubtedly file a motion to dismiss the plaintiffs’ various claims. Standing alone, the first and third items above may not have been enough for the plaintiffs to survive; those types of claims have been around for several years. But the second item above may be the key. ERISA does not require cheap; it requires that fees be reasonable. A reasonableness inquiry involves an assessment of market rates and value. As we move forward, the strongest fiduciaries will be those who seek out the best solutions for their participants and then ensure the price matches the value. We hope you’ll join the ERISA Attorney Talk for more discussion around these issues.

– Matthew Eickman, J.D., AIF®

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