A] Prelude *
As legal obligations how to use funds within a corporate plan are most relevant, we will now address a fine example thereof.
* For more information about U.S. pension plans and system, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/usa-expat-pensions
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https://expatpensionholland.nl/global-social-security-coverage
B] The Issue
What started as a small law firm filing a handful of suits against 401(k) plans’ use of forfeited funds has evolved into a broad attack on sponsors that raises questions about reducing participants’ expenses. It’s a trend of more law firms filing more lawsuits seeking to use Department of Labor regulations regarding fiduciary duty to supersede IRS rules.
The central issue: What can sponsors do with company contributions to a participant’s retirement account if the employee leaves before being fully vested? (Participants’ contribution aren’t affected.)
Plaintiffs want this forfeited money to be used to reduce plan expenses, which in turn reduces participants’ expenses. However, some plans use the forfeited funds to reduce employers’ contributions to the plans. The IRS says defined contribution plans can use the forfeiture money to reduce employer contributions to the plan or to reduce plan expenses.
ERISA’s duty of loyalty guidelines say sponsors must place participants’ interests ahead of corporate ones. Plaintiffs’ attorneys argue that ERISA supersedes the IRS. The eruption of lawsuits has been accompanied in the early stages by divergent federal court decisions that don’t give plan sponsors — and their ERISA attorneys — a clear picture about how to defend against the lawsuits.
“It’s regulation by litigation,” said Daniel Aronowitz, president of Encore Fiduciary, a fiduciary liability insurance underwriting company. “Plaintiffs’ lawyers are the ERISA police. It’s unfair.” In 12 months of lawsuits, the list of defendants includes a who’s who of the largest corporate retirement plans as well as smaller 401(k) plans.
C] Court rulings
Among six federal court rulings so far, judges have rejected petitions by Qualcomm and Intuit to dismiss complaints. Judges have dismissed lawsuits against HP, Thermo Fisher Scientific and BAE Systems. A sixth judge ruled that the complaint against Tetra Tech should be resolved via arbitration.
The early lawsuits and many of the new ones focused solely on the 401(k) plans’ forfeiture practices. However, some plaintiffs who initially sued sponsors over fees or investment choices amended their complaints to include challenges to forfeiture policies.
D] DOL rules
Some new lawsuits have packaged a forfeiture complaint among other accusations of ERISA violations. The John Muir Health lawsuit, by a 401(k) plan participant, and the Novo Nordisk lawsuit, by former employees, both combined forfeiture allegations amid claims of high record-keeping fees and poor investment choices as ERISA violations.
Unlike lawsuits in which plaintiffs’ lawyers conduct extensive research comparing a defendant’s record-keeping fees, investment management fees or investments’ performance against other retirement plans, forfeiture cases require relatively less homework.
“Forfeiture cases are very straightforward at this point because we know where the money has gone,” said Michael Schloss, of counsel to the Wagner Law Group. “The numbers are easy to find,” Adams added. “These are big numbers. It’s a fairly easy argument to make” about forfeited funds that plaintiffs say should be used to reduce plan expenses.
Forfeiture claims are affected by multiple factors: a sponsor’s retirement plan document, the number of participants, the vesting policy for employer contributions and the years plaintiffs allege ERISA violations took place.
E] IRS/DOL
The problem for sponsors is compounded by a lack of reconciliation between the IRS and the DOL, whose ERISA guidelines define a sponsor’s fiduciary duty. “It would be nice” if the DOL and IRS would act to reduce the uncertainty, said Wagner Law Group. “A government announcement one way or the other would go a long way to resolving the issue.”
ERISA experts said they aren’t aware of any recent DOL efforts, such as filing an amicus brief in a forfeiture case, to articulate policy. “We need the Department of Labor to step in and give guidance,” Aronowitz said. “The sponsors are making a good faith effort to follow the IRS regulations.”
If managing forfeitures is considered an administrative role under ERISA this is not a fiduciary one. If courts focus on forfeitures as plan assets, “there will be teeth to these lawsuits,” said Schloss. “I expect there will be more cases.”
Another key issue is how a sponsor’s plan document is written. One way to avoid a lawsuit is to have a plan document that only allows forfeited funds to reduce plan expenses, lawyers say. Another recommendation is to write a plan document that says forfeited funds can only be used to reduce employer contributions.
Writing a plan document that only addresses employer contributions “would certainly take the wind out of the sails of plaintiffs’ lawsuits,” said Schloss. “Amend the plan document to take the choice out of an administrator’s hands” by removing fiduciary responsibility, Caleb Barron, said in an interview. “In that way, the administrator is just following the document.”
Given the flurry of lawsuits, DC plans that give plan executives discretion in using forfeited funds “may be the low-hanging fruit” for ERISA complaints, he said. “Generally, if a plan administrator is acting with discretion, it is acting in a fiduciary capacity” and subject to an ERISA claim, Barron wrote in a note to clients.
“When the plan administrator has no discretion, it is generally acting in a ministerial capacity,” the note said. “The key is that the plan administrator cannot be faulted for making a choice it does not have.” However, some plan documents may lend themselves to interpretations upon which plaintiffs’ lawyers seize to claim sponsors should have cut plan expenses.
F] Finally
Once again we see that it pays of to look ahead when starting or adjusting the corporate pension plan and have constructive and realistic negotiations between company and participants.