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Fiduciary Update

Fiduciary Update | May 2017

In this quarter’s Fiduciary Update, CAPTRUST’s Drew McCorkle provides an update on the DOL’s conflict of interest rule expansion and compliance, deathbed beneficiary changes, required minimum distribution, and other fee related litigation.

DOL Fiduciary Expansion: Delay and Continued Uncertainty

In early April, the Department of Labor (DOL) completed its much-anticipated 60-day extension for implementing its conflict of interest rule—more commonly known as the fiduciary rule. The rule and accompanying prohibited transaction exemptions (PTEs) will now be effective on June 9, with certain provisions effective on January 1, 2018, as previously established. During the delay, the DOL is carrying out President Trump’s February 3 directive to re-evaluate the rule. Although the outcome of this review is uncertain, Secretary of Labor Alex Acosta has been critical of the rule.

In an unexpected move, the DOL introduced a new transition period from June 9 through January 1, 2018. During this period, those meeting the updated definition of an ERISA fiduciary and utilizing the Best Interest Contract (BIC) Exemption will get relief from many of the more involved requirements of the exemption—so long as they adhere to the Impartial Conduct Standards for advice rendered. In short, to adhere to these standards, advice must be delivered in the best interest of the recipient, and the advice provider must charge reasonable compensation and may not make any misleading statements.

As we go to press, it is expected that most, if not all, recordkeepers will move forward with their previously planned and announced approaches to comply with the rule (and any related PTEs). The transition period relief noted above, however, may affect the specifics of provider rollouts.

Whether the new fiduciary rule survives as currently written continues to be a “known unknown.”

Directed Trustees’ Limited Responsibility Saves/Costs $1.7 Million

A pension plan sponsor had a longstanding relationship with BNY Mellon, which served as a directed trustee and custodian, executing investment decisions as instructed by the client. BNY Mellon did not have discretionary authority over the plan’s assets. The same team at BNY Mellon worked with the client for 10 years and came to be a trusted partner in the execution of investment trades. Different trade types required different directions, and staff at the client apparently did not develop a familiarity with what was required for each. Everything went along fine—with the BNY Mellon team going above and beyond what was required to follow up on and clarify trade orders—for a while. Then there was complete turnover of the BNY Mellon team.

After the staff turnover, the client directed a $15 million investment into an international fund that required a specific wiring instruction. The wiring instruction was not provided, so the $15 million was held in the cash sleeve of the international fund pending further direction—and was not invested in international equities. The former team, when it encountered this situation previously, followed up to get required wiring instructions. The new team did not follow up, understanding the direction to be for the $15 million to be held in the international fund’s cash account until further direction was received. During the three months that the money was held in cash, the plan missed out on gains of $1.7 million.

The plan’s fiduciaries sued BNY Mellon for breach of fiduciary responsibility in not following up when the international investment did not include wiring instructions that would enable funding the international equity investment. Finding that BNY Mellon was a directed trustee, with no fiduciary role or responsibility, the court held that BNY Mellon had met its responsibility and had no liability. Absence of the wiring instruction, predictably, resulted in the investment being held in cash. Although following up would have been a best practice, it was not BNY Mellon’s obligation to do so. The court considered and rejected an argument that, over time, BNY Mellon’s consistent behavior of following up with the client somehow imposed a fiduciary duty on BNY Mellon to continue to do so. Harley v. Bank of N.Y. Mellon (D.C. S.D. New York 2017).

Bottom line: The buck stopped with the plan fiduciaries, but the bank ultimately lost the client’s business.

Strict Compliance with DOL Plan Appeal Rules Required

ERISA sets specific rules and timing for how plan fiduciaries handle appeals from benefit denials. This is one of the main ways ERISA comes into play for unfunded health plans. (The same rules apply to appeals from retirement plan benefit denials, which happen rarely.) When plan documents include the necessary language, fiduciary committees have wide latitude in making discretionary decisions, and those decisions will be respected by the courts—unless they find an abuse of discretion by the committee.

We previously reported on the case of Halo v. Yale Health Plan (2nd Cir. 2016), in which the court found that the Yale Health Plan did not follow its own appeal processing rules, and as a result, the court substituted its own judgment for the committee’s. Following the reasoning in Halo, the court in Salisbury v. Prudential Insurance Company of America (D.C. S.D. New York 2017) required strict compliance with ERISA’s appeals process regulation. One of those rules requires that a plan administrator rule on a participant’s appeal within 45 days of the appeal unless there are special circumstances. Then, one 45-day extension is permitted.

Salisbury sought long-term disability benefits from her employer, who had hired Prudential to administer the plan and handle appeals. After benefits were denied, Salisbury appealed. Forty days later, Prudential replied, saying that it was seeking an extension of 45 days to permit review of the file but noted no special circumstances. Salisbury’s benefit appeal was eventually denied on the 90th day following the appeal. Salisbury sued for disability benefits, arguing that the court should decide the matter without considering the plan’s position. Finding that Prudential did not comply with the DOL’s process, the court agreed that it would decide the matter without regard to the plan’s views.

Following this decision, plan sponsors, particularly those in the Second Circuit (Connecticut, New York, and Vermont), should verify that administrators of their plans are aware of this development and are not routinely extending the 45-day deadline without material justification.

Deathbed Beneficiary Change Not Followed

Following guidance from the Supreme Court that plan documents and requirements must be complied with, a participant’s deathbed beneficiary change was not followed. A plan participant was diagnosed with terminal cancer and, shortly before her death, decided to change the beneficiary for her plan benefits. She called her former employer’s human resources department and asked how to make the change. She was told to send a letter with specific information, which she completed and put in the mail the day before her death. Her letter included two beneficiary designation cards with the new beneficiaries’ information. The cards were not signed, but on the signature line, she wrote, “As stated in letter.”

Unfortunately, the plan’s summary plan description clearly required changing beneficiaries by submitting a new signed beneficiary designation card. The plan administrator rejected the letter because it was not the required beneficiary designation card and rejected the new beneficiary designation cards because they had not been signed and dated. When the new beneficiary sued, the court rejected the attempted beneficiary designation change because the plan’s specific requirements had not been followed. Ruiz v. Publix Super Market, Inc. (D.C. M.D. Florida 2017).

This case underscores the importance of human resources personnel keeping in mind that strict compliance with plan requirements is often required, and substantial compliance will not do.

Cross-plan Offsets Present Grave Conflict of Interest

ERISA and the DOL have long held that the assets of any one plan—health or retirement—must be used exclusively for the benefit of participants and beneficiaries of that plan. To do otherwise violates ERISA’s exclusive benefit rule.

In Peterson v. Unitedhealth Group, Inc. (D.C. Minnesota 2017), the court examined and rejected a health plan practice of cross-plan offsets. Health insurance and health plan administration firm United had a companywide practice for handling overpayments to doctors and other providers. If United believed Dr. Smith was overpaid in connection with services provided to a participant in Plan A, the next time Dr. Smith provided services to a participant in a United plan—Plan B—the amount due to Doctor Smith in connection with Plan B services would be offset by the amount United considered to be the overpayment on Plan A. In many instances, Plan A, which made the overpayment to Dr. Smith, was fully insured (being paid from United’s business assets), and Plan B, whose fee was offset by the Plan A overpayment was self-funded (being paid from plan assets).

A primary issue with this is crossing plan boundaries with the payment and settlement of provider claims. In addition, as applied here, cross-plan offsets also presented a conflict in which self-funded plans’ assets were used to refund overpayment of fully insured claims, directly benefiting the insurance company. In this scenario, the judge characterized United as “judge, jury and executioner.”

After noting that fiduciary duties are among “the highest known to the law,” the judge highlighted the obligations of plan fiduciaries to act in the best interest of the respective individual plans they are handling—and not themselves or the plans as a whole. Although this case arose in a health plan environment, the principles of each plan standing on its own apply equally in a retirement plan context.

Fee and Related Litigation

Fee litigation continues apace, with increasing focus on financial services firms. These claims generally allege that the financial services firms used their own investments or services to the financial detriment of plan participants. Recent examples of this type of suit include:

  • Teachers Insurance & Annuity Association of America (TIAA). Sued for not permitting revenue sharing on its funds to be paid to any firm other than itself. Dismissed because TIAA as the plan recordkeeper is not a fiduciary. Patricia v. Teachers Ins. & Annuity Assn. of America (D.C. S.D. New York 3-7-17).
  • Teachers Insurance & Annuity Association of America (TIAA). Sued for improper participant loan practices in a 403(b) plan. According to the complaint, participant plan loans are made from TIAA’s general account, and participants make payments of principal and interest to the general account. To secure the plan loans, TIAA transfers collateral to its general account from the participant’s account equal to 110 percent of the loan. Participants repay a market rate of interest (e.g., 4.5 percent), but the collateral earns interest at the general account contract rate (e.g., 3 percent). The complaint alleges that the interest payment differential (1.5 percent) should accrue to participant accounts. Haley v. Teachers Ins. & Annuity Assn. of America (D.C. S.D. New York, filed 2017).
  • Aon Hewitt. Sued for collecting unreasonably high fees in connection with investment advice services offered through Financial Engines. This case was filed in 2017 and is pending in U.S. District Court in Illinois. It is reportedly the fourth such suit against a plan recordkeeping firm.
  • Franklin Templeton. The firm was sued in July 2016, alleging improper use of its own funds and services and overpayment of fees and expenses. Early dismissal of the case was denied in early 2017, with the judge concluding that the case should proceed. Cryer v. Franklin Templeton Resources, Inc. (D.C. N. D. California 1-17-17).
  • Claims alleging improper use of their own funds or services or overpayment of fees and expenses have been filed in 2017 against J.P. Morgan Chase (pending in U.S. District Court in New York); T. Rowe Price (pending in U.S. District Court in Maryland); Schwab (pending in U.S. District Court in California); Jackson National Life Insurance Co. (pending in U.S. District Court in Michigan); and BlackRock Institutional Trust Co. (pending in U.S. District Court in California). A number of other similar suits have been filed.

Required Minimum Distributions Getting Attention

When participants in 401(k) and other retirement plans reach age 70 1/2, the tax code’s required minimum distribution (RMD) rules are triggered, and most participants must begin receiving minimum distributions. These rules also apply to traditional IRAs, although they vary slightly. RMDs are actuarially determined, and the objective is for retirement assets to be used in a participant’s retirement years and not passed on to later generations. The consequence of failing to take RMDs is significant: 50 percent of the amount not paid is due as tax liability for the person who was supposed to receive the distribution.

The first wave of baby boomers is reaching age 70, so this will become an increasingly relevant issue. The U.S. Chamber of Commerce has requested that the Trump Administration repeal the RMD rules or increase the triggering age to 75. As long as the rule is in force, plan sponsors should confirm that their recordkeepers are tracking this and alerting affected participants so timely distributions can be made.

IRS Audit Guidance on Hardship Distribution Documentation

The Internal Revenue Service has published an internal memorandum to employer-sponsored plan auditors on the documentation they should look for in connection with hardship withdrawals. While not binding on plan administrators (as a regulation would be), this memorandum has similar practical effect by letting the public know what the IRS will be looking for in plan audits.

Participants may self-certify the need for a hardship distribution. However, the regulations do not address maintenance of records to support self-certification. The new memorandum acknowledges that plan sponsors and recordkeepers may not necessarily receive original documentation supporting a hardship withdrawal. Rather, they can receive only a summary of the information, as long as there is enough detail to support the distribution. The participant would retain the documents.

The memorandum includes requirements for notice to participants that they will be responsible for maintaining documents, including the responsibility to produce the documents, if requested. Some plan recordkeepers already offer a hardship process through which participants are responsible for maintaining necessary documentation, and others may be expected to follow suit.

It is likely that not all plan sponsors will elect to use this approach. More conservative plan sponsors may decide to continue to retain documentary support for all hardship withdrawals. Tax qualification is dependent on proper plan administration, and some plan sponsors prefer to make it more difficult for participants to obtain hardship withdrawals.


  • Suit Against Corporate Board for Failure to Monitor Committee Proceeds. Corporate boards and others who appoint ERISA fiduciary committees are fiduciaries in the act of making those appointments. As a result, they have a duty to monitor that the committees they appoint are functioning. In Bell v. Pension Committee of ATH Holding Company, LLC (D.C. S.D. Illinois 3-23-17), a fiduciary committee was sued for paying unreasonable investment management and administrative fees and not considering the use of a stable value fund rather than a money market fund. The board of directors that appointed the committee was also sued for not monitoring the committee’s work. The court denied a motion to dismiss the failure to monitor claim against the board. Whether the board met its monitoring obligation will be considered as the litigation progresses.
  • Does it count when I click the “I Have Read This” box? Yes it does. Corporate employees were awarded employer stock, and one step in accepting the awards was clicking a box acknowledging that they had read three attached documents. The attached documents included a non-compete agreement. The specific language on the electronic form did not require an acknowledgement that the employee agreed with the documents, but only that he or she had read them. Subsequently, employees who had received these grants and checked the “I have read these documents” box went into a competing business. The non-compete agreement was enforced in U.S. District Court. The employees challenged enforcement of the non-compete agreement because they had not expressly agreed to the agreement’s terms. The employees lost in U.S. District Court, and that decision was affirmed by the U.S. Court of Appeals for the Third Circuit. ADP, LLC v. Lynch (3rd Cir. 2-7-17).