Retirement Plan Industry Update – Q3 2020
October 27, 2020
Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®
To view and download a PDF of this commentary, click here.
Well-Known ERISA Plaintiffs’ Attorney Hit with $1.5 Million Fine for “Reckless” Fiduciary Claims
Jerome Schlichter, the leading plaintiffs’ attorney in numerous ERISA lawsuits, was recently sanctioned and ordered to pay up to $1.5 million by a U.S. District Judge for being “reckless”. In Obeslo vs. Great-West Life, Schlichter Bogard & Denton accused Empower Retirement of charging fees “so disproportionately large that (they) bear no reasonable relationship to the services rendered.”
In reviewing the case, U.S. District Judge Christine M. Arguello stated that Schlichter and his firm “recklessly pursued their claims through trial, despite the fact that they lacked merit”. The federal judge cited a number of concerns about the plaintiff’s case, including:
- One of the plaintiffs’ attorney’s expert witnesses contradicted himself and had a “complete lack of credibility”
- Schlichter’s firm placed an ad in a newspaper seeking individuals to join the suit, making the case appear to be “manufactured”
- The evidence appeared to suggest that the decision to continue through trial was driven by the attorneys who had a far greater incentive than the plaintiffs who stood to gain a relatively small amount
- The named plaintiff testified at the trial that her retirement account, “was making money every time she looked at it. It kept going up, which is what she wanted.”
Judge Arguello found the attorneys personally liable for the defendants’ “excess costs, expenses, and attorney fees reasonably incurred from the period beginning on the first day of trial and ending on the date the defendants filed the motion for sanctions”. She said the total fees and costs shall not exceed $1.5 million.
The case underscores the incentive some law firms see in pursuing retirement plan litigation, despite valid issues.
(Moore, 2020) (Sullivan, 2020)
Department of Labor Provides a Safe Harbor for Electronic Disclosure – UPDATE
The Department of Labor (DOL) recently finalized the new rule regarding electronic delivery of required participant disclosures under the Employee Retirement Income Security Act (ERISA). These rules are designed to make the delivery of required notices more efficient and effective for both plan sponsors and plan participants.
Examples of covered ERISA disclosure notices include:
- Quarterly participant statements
- 404(a)(5) participant fee disclosure notice
- 404(c) notice
- Qualified default investment alternative (QDIA) notice
- Automatic enrollment notice
- Summary plan description
- Summary of material modifications
- Summary annual report
- Blackout notice (applicable during mergers and transitions)
Who must receive the disclosure notices?
- “Eligible participants” including active employees who are eligible for the plan, terminated employees with an account balance, and beneficiaries of deceased participants with an account balance
The initial notification requirements to obtain safe harbor protection include:
- The plan must provide a paper notice to all eligible participants who will be receiving electronic disclosures. The notice must include:
- a statement that covered documents (see list above) will be sent electronically going forward
- the e-mail address that will be used
- a statement of the right to request a paper version, free of charge
- a statement of the right to opt out of electronic delivery and receive only paper copies
- On an ongoing basis, there are two methods for electronic delivery:
- Attach the required disclosure directly in the e-mail
- Provide a link to the website and a description of the notice in the e-mail
IRS Releases 2021 Retirement Plan Limits
(John Hancock, 2020)
Industry Consolidation and Outsourcing Continue
Over the past decade, the retirement plan industry has seen enormous consolidation in the recordkeeping space. The top five recordkeepers' market share has increased from 43% in 2012 to more than 54% in 2019. And this trend continues, with several large acquisitions and outsourcing deals recently announced:
- April 9, 2020 – Principal to acquire Wells Fargo’s retirement plan business
- July 15, 2020 – Vanguard to outsource its retirement plan recordkeeping business to Infosys
- September 8, 2020 – Empower to acquire MassMutual’s retirement plan business
- September 9, 2020 – ICMA-RC to partner with SS&C to advance its recordkeeping platform
- September 14, 2020 – Nationwide to partner with SS&C to transform its retirement plan business
- September 28, 2020 – Empower to buy Fifth Third’s recordkeeping business
Update on the Department of Labor Lifetime Income Disclosures
Effective on September 18, 2021, the DOL will require that participant statements for defined contribution plans provide two lifetime income illustrations expressed as a single life annuity and a joint and survivor annuity.
The regulation requires the plan administrator to use the following assumptions for converting the participant’s account balance into lifetime income streams:
- The monthly payments start on the last day of the statement period.
- The participant and his/her spouse are 67 years old.
- The interest rate is the ten-year Treasury.
- The mortality table is the same one used for defined benefit lump sum payments.
Plan sponsors will receive safe harbor protection from liability if they use the required assumptions and provide the model explanation.
Concerning the new disclosure rules, the DOL is taking comments until November 17, 2020.
(Salkinand & Watson, 2020)
MassMutual (2020, October 7). Participant Disclosures Under ERISA. Mass Mutual. Retrieved on October 14, 2020 from http://wpbcphoenix.org/resources/Participant%20Disclosures%20Under%20ERISA%20RS-50184-00%20exp%202021-1231%202-per-page.pdf
Salkinand B. & Watson, R. (2020, September 28). DOL Lifetime Income Disclosure Regulation Explained. 401kspecialistmag.com. Retrieved on October 14, 2020 from https://401kspecialistmag.com/dol-lifetime-income-disclosure-regulation-explained/?utm_source=401k&utm_medium=email&utm_campaign=401k_enl_09292020
Moore, R. (2020, October 1). Well-Known ERISA Plaintiffs’ Attorneys Sanctioned for ‘Reckless’ Litigation. Plansponsor. Retrieved on October 14, 2020 from https://www.plansponsor.com/well-known-erisa-plaintiffs-attorneys-sanctioned-reckless-litigation/?utm_source=newsletter&utm_medium=email&utm_campaign=Newsdash
Sullivan, J. (2020, October 1). Schlichter Hit for $1.5 Million for ‘Reckless’ Fiduciary Claims. 401kspecialistmag.com. Retrieved on October 14, 2020 from https://401kspecialistmag.com/schlichter-hit-for-1-5-million-for-reckless-fiduciary-claims/
Empower (2020, June 11). Industry Consolidation: It’s a Scale Business. Great-West Life & Annuity Insurance Company
John Hancock (2020, October 20). 2021 Contribution and Benefit Limits. Retrieved October 26, 2020 from https://assets.jhnavigator.com/managed_assets/itemFiles/USA/22044-1020_2021_ContributionLimits_Update_Secured.pdf
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