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Retirement Plans
Fiduciary Update | August 2021

Fiduciary Update | August 2021

In this article, CAPTRUST’s Drew McCorkle dishes out the latest in fiduciary updates for the third quarter of 2021. Read on for a rundown of a fee litigations case the Supreme Court is considering, the use of ESG investments in 401(k) and other individual account retirement plans, why inherited 401(k) accounts are protected from creditors, and more.

U.S. Supreme Court Will Hear Plan Fees Case

The U.S. Supreme Court has accepted a case that could significantly impact Employee Retirement Income Security Act (ERISA) fee litigation cases. Hughes v. Northwestern University (S. Ct. 2021). A few years ago, several separate cases were filed against major colleges and universities making the now familiar claims that they had overpaid for recordkeeping services and investments and improperly managed their plans. Three of these cases were brought in different federal judicial circuits, and the complaints (the initial filings in a lawsuit) made essentially the same claims.

As is often the case, motions to dismiss were filed in these cases. A motion to dismiss contends that—without delving further into the facts—the complaint does not include sufficient allegations for the case to proceed. In two of these cases the motions to dismiss were denied and the cases proceeded to litigation. In the third, against Northwestern University, the motion to dismiss was granted, and the dismissal was upheld by the U.S. Circuit Court of Appeals for the Seventh Circuit.

Noting the different outcomes in different federal circuits, the plaintiffs in the Northwestern University case asked the Supreme Court to take the case to resolve the conflicting results. The Supreme Court asked the Department of Labor (DOL) whether it should take the case. The DOL supported the Supreme Court taking the case noting its disagreement with the dismissal of the case. The outcome of this case will be closely watched across the retirement plan industry. Over the past several years, hundreds of class action lawsuits have been filed challenging administration and investment fees in plans sponsored by both higher education and corporate organizations. Lower courts have taken differing positions on what is required for a claim to proceed. This decision could change the legal landscape, making it easier—or more difficult—for these claims to succeed.

Inherited 401(k) Is Protected from Creditors—Unlike an Inherited IRA

Chris and Holly Dockins filed a petition for personal bankruptcy in April of 2020. Several years earlier, Holly and Kirk Morishita were in a relationship, and Kirk had designated Holly as the beneficiary to receive his 401(k) plan account. Kirk Morishita died two months before the Dockins bankruptcy filing. He had not changed his beneficiary designation. So, at the time of the Dockins’ bankruptcy filing, Holly was the legal owner of a 401(k) account. She was notified of her inheritance before she and Chris filed their bankruptcy petition.

The bankruptcy trustee sought to include the inherited 401(k) account in the bankrupt estate so it could be paid out to the Dockins’ creditors. The trustee relied on a recent Supreme Court decision on the related issue of whether an inherited individual retirement account (IRA) is protected from creditors. The Court concluded that an inherited IRA was not protected. Under the law applicable to IRAs, money accumulated for a bankrupt person’s retirement is protected, but an inherited IRA was accumulated for another person’s retirement and not protected. Clark v. Rameker (S. Ct. 2014).

Of course, the Dockins disagreed. Their position was that unlike an IRA, the inherited 401(k) is covered by ERISA’s anti-alienation provisions, which protects plan assets from the claims of participants’ and beneficiaries’ creditors. The judge agreed, noting ERISA’s rule protects assets in 401(k) plans and other tax-qualified retirement plans for participants and their beneficiaries. Protection from creditors remains until the assets are withdrawn from the plan. In re Dockins (Bankr. W.D. N.C. 2021).

DOL: Recording of Participant Call Must Be Provided

The DOL has issued an information letter indicating that a recording of a phone call between a plan participant and a plan representative must be made available to the participant if the call is related to a benefit determination. In the course of appealing a benefit claim denial, a participant is entitled to all documents, records, and other information relevant to the claim denial. The participant in this situation requested a transcript of a call they had with a plan representative. The request was denied because only the notes of the call were made available, the recording was for quality assurance purposes, and it was not used in the claim determination process.

The disappointed participant asked the DOL for guidance on whether the recording or a transcript was required to be provided. The DOL responded that the recording or transcript had to be provided upon request because it was created in the course of making a benefit determination, even though it was not relied upon in making the benefit determination. Information letters are issued by the DOL to call attention to established principles under ERISA. Notably, the DOL did not indicate that a recording would be required to be produced if it was not related to a benefit determination.

Federal Employees Getting Access to ESG Investments—Through a Mutual Fund Window

We have previously reported on the varying and inconsistent positions taken by the DOL on the use of environmental, social, and corporate governance (ESG) investments in 401(k) and other individual account retirement plans. In the last months of the Trump administration, the DOL issued the Financial Factors in Selecting Plan Investments rule, also known as the ESG Rule. Then enforcement of the regulation was suspended after President Biden took office. Additional guidance is anticipated from the DOL that embraces the use of ESG investments.

The ERISA issue with ESG investments arises from the exclusive benefit rule, that plan assets may be used only to provide retirement benefits and pay reasonable plan expenses. By their very nature, ESG investments have a secondary objective. Investment results cannot be sacrificed to advance the secondary objective—no matter how laudable. So, the selection of specific ESG investments to include in a plan presents challenges to plan fiduciaries.

A way to manage the issue of having plan fiduciaries select specific ESG investments for a retirement plan lineup is to include a self-directed brokerage window in the plan. Through a self-directed brokerage window, plan participants have the option of investing in a full range of investments made available, including ESG investments (within limits, this range of investments can be narrowed by the plan fiduciary). Plan fiduciaries are not responsible for monitoring the underlying investments in the self-directed brokerage window, so long as they have not selected specific investments to make available.

The federal Thrift Savings Plan (TSP) is the defined contribution plan for federal government employees. Functionally it is similar to a 401(k) plan. It has recently been announced that the TSP will be adding what has been characterized as a mutual fund window that is similar to a self-directed brokerage window. The TSP’s mutual fund window will reportedly include more than 5,000 mutual funds, some of which are expected to be ESG investments. It is scheduled to go live in the summer of 2022.

Pension Miscalculation Not a Fiduciary Breach

From time to time, two participants in Northrop Grumman’s pension requested estimates online of their pension benefits using different retirement ages and other variables. The estimates (approximately $2,000 and $1,600 per month) were mailed to the participants on Northrop Grumman letterhead. After receiving these estimates, the participants retired and initially their pension payments matched the estimates. However, it was determined that the actual payments should have been approximately $810 and $825 per month, and one participant was required to repay $35,000 in overpayments. Each participant had two periods of employment with the employer, and the wrong period was used to initially calculate their benefits.

The participants sued alleging a fiduciary breach in the calculation of their benefits. The court disagreed, noting that fiduciary functions include the exercise of discretion and the calculation of a benefit using an established plan formula was not a discretionary action. The fiduciary breach claim was dismissed. The dismissal was appealed to the U.S. Court of Appeals for the Ninth Circuit, which affirmed the dismissal. Bafford v. Northrop Grumman Corp. (Ninth Cir. 2021).