The US Department of Labor has been extremely active in recent years as the federal agency investigating compliance with and enforcing the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). These investigations have frequently resulted in findings of fiduciary breach and monetary recoveries for ERISA retirement plans. Please see our recent LawFlash on this topic, and reach out to the LawFlash authors or your Morgan Lewis contacts if you have additional questions.
The Employee Benefits Security Administration (EBSA) at the US Department of Labor (DOL) compiles statistics every year to measure its activities as the agency responsible for investigating and enforcing the fiduciary duties under ERISA. Statistics for the agency’s 2018 fiscal year enforcement activities affirm that EBSA’s enforcement program remains extremely active, with a particular focus on terminated vested participant investigations.
In June 2018, the US Court of Appeals for the Fifth Circuit officially ordered the US Department of Labor (DOL) to vacate the so-called DOL Fiduciary Rule—the name generally used to refer to the 2016 amendment to the definition of fiduciary “investment advice” under ERISA and Internal Revenue Code Section 4975—and its related exemptions. As a result of this order and the DOL’s decision not to appeal, the DOL Fiduciary Rule is regarded as effectively repealed, leaving just the formality of removing it from the Code of Federal Regulations. But the rule continues to influence developments not only in the retirement area, but also beyond.
There are two distinct types of insurance products that ERISA plan fiduciaries should be aware of. We get a lot of questions about these, so we thought a refresher may be in order.
First, there is the insurance product ERISA actually requires. This is the bond required by Section 412 that is intended to protect employee benefit plans from risk of loss due to fraud or dishonesty. This requirement applies to every person who “handles funds or other property” of an employee benefit plan, with certain exceptions. “Handles” is construed broadly and includes not just physical contact with plan funds or property, but also the power to transfer funds or property from a plan to a third party, or the authority to direct disbursements of such funds or property. The US Department of Labor (DOL) has said that a plan investment committee “handles” plan assets if the committee’s investment decisions are final (including, for example, the decision of which investment manager to hire), so each member of such committee should be bonded. On the other hand, fiduciaries who make recommendations that are subject to approval by other fiduciaries do not “handle” plan funds or property, and so on that basis, they would not need to be bonded.
Contributions to individual retirement accounts (IRAs) for a given year are due by the tax return filing deadline for that year, excluding extensions. For most IRA owners, the deadline for making their 2018 IRA contributions is Monday, April 15, 2019. However, for IRA owners who live in Maine or Massachusetts, the deadline is Wednesday, April 17, 2019.
Many participant-directed 401(k) plans these days include a self-directed brokerage window option as a way to supplement the plan’s menu of designated investment options. While the plan’s menu may be limited to 10–25 investment alternatives, depending on the particular plan (for this purpose, counting a target-date fund suite as a single alternative), a brokerage window can provide access to several thousand mutual funds as well as—depending on the particular arrangement—the ability to trade in individual stocks, bonds, options, or other securities.
In recent weeks, there have been a number of reports that the US Department of Labor (DOL) has been taking a more aggressive approach in enforcement actions involving late participant contributions and loan repayments and other errors self-reported by ERISA plans on their Forms 5500. These reports underscore the importance of timely, full correction when a plan discovers such late contributions and loan repayments, and other fiduciary breaches.
Under applicable DOL rules, participant contributions and loan repayments must be remitted to the plan’s trust as soon as the money can reasonably be segregated from the employer’s assets (and no later than 15 days, unless the plan qualifies for a small plan exception). The DOL’s view is that it is a breach of fiduciary duty when the payments are made into the plan’s trust later than that. The delay is treated as an unauthorized loan of plan assets and, therefore, a nonexempt prohibited transaction. The DOL has treated these breaches as an enforcement priority and regularly reviews this issue during its plan investigations (the DOL having primary investigatory authority of ERISA’s fiduciary duty provisions, and a robust investigatory program). The DOL frequently cites ERISA plan fiduciaries for fiduciary breaches due to such late contributions and loan repayments.
Legend has it that this was Mark Twain’s response to a newspaper publishing his obituary when he was very much alive. In reality, it appears his response was not quite as pithy, but why let the facts get in the way of a good story?)
The quotation (actual or embellished) oddly applies to the current situation in which we find ourselves with the fiduciary rule. For those of you who may have somehow missed the earlier installments of this saga, the US Department of Labor (DOL) proposed a change in an over-30-year-old definition of “fiduciary” in the context of providing non-discretionary investment advice. The rule was initially proposed, then retracted, and then re-proposed before it ultimately became final and went into effect in June 2017. The overall impact of the rule was to cause more parties to be ERISA fiduciaries than under the old definition. Fiduciary status is important because it affects the types of compensation that the advice provider can receive.
Join Morgan Lewis in May 2018 for these programs on a variety of topics in employee benefits and executive compensation, including investment related matters.
- 2018 Morgan Lewis Advanced Topics in Hedge Fund Practices Conference: Manager and Investor Perspectives
- SEC Proposed Standards of Conduct for Retail Advice| May 9 | Webinar presented by Chris Cox, Jennifer Klass, Steven Stone, and Brian Baltz
- 2018 Technology May-rathon: Benefits and Compensation – Implications of Tax Reform on Executive Compensation, Fringe Benefits, and Misconduct Settlements | May 29 | Webinar presented by Jonathan Zimmerman and Steven Johnson
We’d also encourage you to attend the firm’s Global Public Company Academy series:
- Morgan Lewis Global Public Company Academy—When the SEC Calls: The Nuts and Bolts of Dealing with Enforcement and Corp Fin | May 2 | Webinar presented by Peter Chan and Celia Soehner
- Morgan Lewis Global Public Company Academy—Granting Equity Outside Home Jurisdictions – US, Asia, and Europe | May 16 | Webinar presented by Kate Habershon Gina Lauriero, and Zaitun Poonja
Visit the Morgan Lewis events page for more of our latest programs.
The US Department of Labor (DOL) issued Field Assistance Bulletin (FAB) 2018-01, on April 23. This FAB updates previous DOL Interpretive Bulletins (IB 2015-01 and 2016-01) regarding an ERISA fiduciary’s consideration of environmental, social, and governance (ESG) factors when evaluating investments for employee benefit plans and when voting proxies and exercising other shareholder rights. The appropriate role of ESG factors, as well as the appropriate fiduciary approach to proxy voting and shareholder engagement, are issues of perennial interest to the DOL and a topic that tends to shift with the political winds. The key issue here is how the consideration of ESG factors fits with an ERISA fiduciary’s obligation to act prudently and solely in the interest of plan participants and beneficiaries, including when making investment decisions.