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DOL Goes After Social Investing by way of ESG's

December 23, 2020

The Department of Labor (“DOL”) is adopting amendments to the ‘‘investment duties’’ regulation under Title I of ERISA effective January 12, 2021 (29 CFR Parts 2509 and 2550). The amendments require plan fiduciaries to select investments solely on the risk adjusted value of an investment and not for any non-monetary factors (such as social welfare or environmental concerns). The rule is meant to bar fiduciaries “from sacrificing investment return or taking on additional risk to promote non-pecuniary goals.” If an investment is chosen for non-pecuniary reasons to break a tie between 2 comparable investments, then the fiduciary must carefully evaluate, analyze, and document the choice. While a fiduciary is not prohibited from including an investment fund or model based on non-pecuniary goals, it must satisfy loyalty provisions under ERISA and not simply provide a non-pecuniary alternative if it has a less favorable risk adjusted value.

While the final rule itself does not mention Environmental, Social, and Corporate Governance investments (“ESGs”), the background information provided by the DOL states that “ESG investing raises heightened concerns under ERISA.” Rather than completely banning ESGs however, the DOL emphasized that “plan assets may never be enlisted in pursuit of other social or environmental objectives at the expense of ERISA’s fundamental purpose of providing secure and valuable retirement benefits (emphasis added).” The DOL states that ESG-themed funds have been over-weighted in technology and under-weighted in energy, but notes that technology has, in fact, performed better in recent years than energy. It also notes that energy companies may have a higher risk assessment due to hazardous waste concerns, but ESGs may have other risks, higher fees and be less diverse.

Trustees and Plan Investment Advisors should be prepared to analyze and document the selection of any ESG or fund that was chosen as a “tie-breaker” and show they were not selected for purely “non-pecuniary” reasons. ERISA plans that lean toward an environment-forward or socially-conscious approach to investing should be well organized and prepared to document a prudent assessment of risk and return to show that the investments made will be the most likely to generate the highest financial benefit for its Participants.  

SECURE Act Becomes Law

January 29, 2020

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019.  It is possibly the worst acronym for a law we have ever heard.  In any event, the SECURE Act and other provisions in the new law are touted as bipartisan reforms that will increase access to workplace retirement plans and expand retirement savings. We view them as largely favoring businesses, but, in this instance, is not a particularly bad result, although much more could have been done for the benefit of workers. The legislation will impact defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs), and 529 plans.

Importantly, some key provisions of the new law include reforms to help address the retirement “coverage gap” by permitting open multiple employer plans (MEPs), thereby expanding access for workers currently without a workplace savings plan. Other provisions, including delaying the starting age for required minimum distributions (RMDs) from age 70½ to age 72; increasing the automatic-enrollment safe harbor escalation cap to 15%; and eliminating the age limit for contributing to a traditional IRA, enable workers to save more and longer, thus enhancing their ability to strengthen their retirement savings.

This legislation may have an almost immediate impact on plan sponsors, participants, and those of you who have, or your members who have, invested in IRAs, with some of the provisions effective on January 1, 2020.  The legislative changes may require Plan Amendments and other administrative adjustments, so be sure to consult your plan professionals.

Specific descriptions of the provisions in the new law are available HERE. If you would like more information, please contact us through the website.


Supreme Court Decides New ERISA Case

June 30, 2020

On June 1, with Justice Kavanaugh writing the Opinion, the US Supreme Court upheld the 8th Circuit’s decision granting a Motion to Dismiss against class action Plaintiffs/Participants who had sued a defined benefit plan over misuse of Plan assets.  In this case, the Plan Trustees who were, of course, fiduciaries, ignored the advice of their consultants, under-diversified the Plan’s assets, invested them in high-risk equities, and caused a much larger loss than was considered normal during the 2008 market crash. They attempted to rectify this by contributing $339 million of Plan sponsor assets to the Plan, bringing it back to overfunded status. Because the participants lost the same amount a diversified portfolio incurred during that period, after the contribution -- the 8th Circuit said, no harm, no foul. In other words, Participants could not assert a breach of fiduciary duty if they did not suffer financial harm. Justice Kavanaugh glibly found that the Participants would receive the same retirement benefits as if the shenanigans had never happened. This case means Participants may not sue their plan fiduciaries for mismanagement if the fiduciaries contribute sufficient funds to the Plan to cover the loss.  Not only does this completely fail to hold fiduciaries accountable for mismanagement, it encourages risky and unethical behavior that could put many more Participants in harm’s way.  Another case in which the Court’s anti-employee pro-employer bias is on full display.

Ninth Circuit Decision: Ryan E. v. Entertainment Industry Flex Plan

June 30, 2020

The issue decided in Ryan E. was whether a Flex Plan had properly delegated discretion over claims and enrollment processing to its contracted third parties.

As many Trustees and Plan professionals know, Trustees must reserve, in writing and in the plan documents, the right to finally interpret and apply the terms of their Plan. Likewise, Trustees may routinely grant discretion to the Trust's insurance carriers, administrator, etc., to make routine interpretations with regard to eligibility and claims processing, subject to appeal.  In Bruch v. Firestone the United States Supreme Court held unless employee benefit plans include the "discretion to interpret and apply" language in plan documents, a reviewing court will place the burden of proof on the Plan. Where the correct language quoted above is set forth in the Plan’s documents, the burden of proof shifts to the Participant.

In Ryan E., Plan language identified Blue Shield ("BS") as the third party carrier and administrator, but the Plan and documents for specific coverages the Flex Plan offered described a very narrow identification for the "carrier”. As many of you know, BS has multiple subsidiaries, units and related entities. These are not always identified as BS or as being part of a single BS entity, but many of them were apparently involved in claims processing. Some of these related BS entities were easy to identify as mere sub-units within BS; others could have been entities totally outside of the BS corporate structure.  

This evidentiary point in Ryan E. caught the attention of the Ninth Circuit and not in a good way. Thus, the Ninth Circuit questioned whether the grant of discretion that clearly went to BS, also extended to the other possibly “hidden” entities involved in the claims process. In the view of the Ryan E. panel, if any of the other entities were not expressly BS sub-units or subsidiaries, those entities were not granted any discretion by the Flex Plan's plan documents and that would change the applicable burden of proof. However, the court opined there was not enough information in the record to determine which of the entities was or was not "an actual BS-related corporate entity." Thus, the case was remanded back to the trial court for more evidence on the issue of the identity of the entities involved in the claim litigated in Ryan E.

We have no doubt that if the evidence establishes an entity that participated in the claims process was not a direct BS-related entity, and "interpreted" the plan document in a manner that resulted in declining the claim, the outcome related to this shifting of the burden of proof could be unfavorable to the Flex Plan. Indeed, should the evidence establish that an unauthorized entity exercised discretion over the claim, the burden of proof would shift to the Flex Plan and that may be a difficult, as well as expensive, burden to overcome.

The good news is a simple fix.  We recommend Trustees and Plan professionals fine tune the Trust's SPD  and other related documents to ensure that the grant of discretion to third parties is broad enough to encompass any entity, including subsidiaries, with whom a third party  consults, uses, relies upon, delegates to, etc., when processing a claim or making other eligibility determinations.

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