Strange but true: Many retirement plan sponsors still implement and operate a 401(k) plan without utilizing the services of an independent ERISA attorney.
They don’t know what they don’t know.
Qualified retirement plans like 401(k)s must adhere to the laws of the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA)—which any retirement plan advisor can tell you is an incredibly complex body of law.
ERISA—the federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans—is big business. There are plenty of law firms focused on bringing lawsuits on behalf of “wronged” participants for issues like charging excessive fees or any number of other issues stemming from a participant believing their plan sponsor has violated their rights under ERISA.
These lawsuits can be costly and time-consuming, and employers must be prepared to defend themselves against any allegations of wrongdoing. That’s why it’s essential for employers to work with experienced ERISA attorneys to ensure the retirement plan is in compliance with the law and to minimize the risk of litigation.
There is no substitute for an independent ERISA attorney when it comes to minimizing liability and helping a retirement plan avoid potentially significant financial harm.
While the industry has a number of high-profile “rock star” ERISA attorneys like Faegre Drinker’s Fred Reish, Marcia Wagner of The Wagner Law Group and Ary Rosenbaum of The Rosenbaum Law Firm P.C., just to name a few, there is no shortage of law firms with considerable expertise in this area. And there is an up-and-coming generation of talent that is taking on new challenges presented by the changing business climate of workplace retirement plans.
One firm that has long specialized in this area is Washington, D.C.-based Groom Law Group, which has built success over decades of solving complex ERISA/employee benefits challenges in the public and private sectors.
EDITOR’S NOTE: This article is the cover story from Issue #2 2023 of 401(k) Specialist Magazine Digital Edition. To read the article in magazine format, click here.
“As a general matter, our practice evolves in concert with the regulatory and legal landscape and the retirement services marketplace itself,” offers Groom Law Group Associate Arsalan Malik, who regularly counsels clients through Department of Labor investigations and other regulatory enforcement actions. “Inevitably, our practice is also shaped by broader trends—namely, the state of the economy and the labor market—since macro trends directly impact our clients’ needs and decisions.”
Shift from DB to DC
Despite being a relatively new law, Malik said it is amazing to see how much has changed since ERISA was first enacted in 1974. “Without a doubt, the most consequential change is the shift from defined benefit to defined contribution plans as the norm.”
Malik says this shift changed the state of retirement affairs, the responsibilities for plan fiduciaries, and has also shaped everything seen in the retirement space today.
“I can’t understate the impact. The defined benefit to defined contribution shift is so consequential that it is perhaps most fairly analogized to a leap in species—meaning, what you would see on an evolutionary chart,” Malik says.
But beyond that fundamental change, the retirement space has evolved in numerous other ways that has implications for ERISA attorneys. A great deal of this has been fueled by technology.
“For example, questions about electronic disclosures, plan data, and cybersecurity were virtually nonexistent for practitioners from the early days of ERISA through a good part of the 1990s,” Malik says. “But today’s generation of ERISA lawyers have had to become familiar with these topics, which is amazing because it is something that wasn’t even contemplated by the statute itself.”
Taking it one bridge further, Malik points to cryptocurrency and digital assets. “This is an area that wasn’t even contemplated—and arguably, not even foreseeable by anyone other than futurists and time travelers—and yet today’s generation of ERISA lawyers has to devote considerable brain power on reconciling these areas with ERISA and explaining the implications to our clients.”
Don’t Sleep on Cybersecurity
Malik goes so far as to say he thinks cybersecurity is the most important issue facing the retirement industry today. Not because of the risk of hackers attacking systems, but rather the risk of hacking people—or what Malik refers to as social engineering.
“While we’ve secured the perimeter with incredible technologies such as antivirus software, sophisticated firewalls, and other measures like encryption and dual-factor authentication, we don’t have anything close to the same arsenal to protect ourselves from social engineering threats,” he says. “To understand the risk, it might be helpful to analogize ‘old school’ hacking as breaking a window to get in a house and social engineering attacks as the burglar obtaining the keys and comfortably walking in the front door.”
With social engineering attacks, Malik said the bad actor carries the outward image of the victim after exploiting any possible vulnerability—a stale password, an unlocked computer, or various random facts about a person that is somehow meaningful when put together. “This is a risk that affects everyone but we don’t have a good answer yet on how to deal with it.”
Beyond cybersecurity, for the foreseeable future Malik said plan fiduciaries will be dealing with important questions about ESG and their potential risk given the constantly shifting legal landscape. “In addition, there is now a well-developed cottage industry of plaintiff’s lawyers who are prepared to file litigation for any perceived misstep, and thus the risk of litigation is an evergreen concern for plan fiduciaries,” Malik said.
Spate of Excessive Fee Lawsuits
Oh yes, the lawsuits. Over the past 10-15 years, hundreds of lawsuits have been filed against 401(k) and 403(b) plan fiduciaries. The lawsuits have typically alleged that fiduciaries acted imprudently in selecting and monitoring funds based on underperformance, but the more common allegation was that the funds’ fees were just too high, says Groom’s Scott Mayland, who’s practice focuses on the fiduciary responsibility and prohibited transaction sections of ERISA.
“The more recent spate of lawsuits filed in 2022 was interesting because they challenged the selection of passively managed target date funds with some of the lowest fees on the market, and the allegation was that the funds underperformed because their asset allocation was too conservative,” Mayland said. “At this point, some of these lawsuits have been dismissed, but most of them are still pending and there could be still be a lengthy appeals process.”
Mayland notes a key issue in these cases is simply how do you measure underperformance?
“Courts generally require that plaintiffs point to a meaningful benchmark to establish that target date funds underperformed. When fiduciaries win these cases, it is often because the court concludes that the plaintiffs cherry-picked a fund that happened to perform better during the time period rather than a meaningful benchmark that compares reasonably well to the funds the fiduciaries selected (or, to take another fruit-related metaphor, that the plaintiffs were comparing apples and oranges).”
He added that plan fiduciaries may be able to protect themselves by considering what an appropriate benchmark for their target date fund might be, based on the investment strategies and objectives of their selected funds, as well as the needs or goals of the plan. “The performance of the selected fund can then be compared to the benchmark as part of the fiduciaries’ ongoing monitoring process.”
SECURE 2.0
When the SECURE 2.0 Act of 2022 was signed into law on Dec. 29, 2022, it ushered in the beginning of a new era of 401(k) plan legal changes—particularly plans sponsored by small businesses. The law’s 92 provisions have various effective dates, meaning retirement plan fiduciaries have to stay on their toes to ensure their plan is ready to meet deadlines as they occur.
As Mayland points out, beginning in 2024, catch-up contributions will need to be made on a post-tax or Roth basis rather than on a pre-tax basis. The required minimum distribution age is going up again—gradually up to age 75. Moreover, the threshold for terminated participants whose small-balance accounts can automatically rolled out of the plan is increasing, from $5,000 to $7,000.
Mayland pointed to SECURE 2.0’s provision regarding auto-portability as one of the law’s more interesting changes. He said auto-portability’s power to move the accounts into a new retirement plan can be a real game-changer enhancing retirement security. “A number of recordkeepers are making auto-portability available, so plan sponsors might expect to see the service offered to them a bit down the line.”
The SECURE Act of 2019 and SECURE 2.0 have also created momentum for the addition of in-plan guaranteed lifetime income solutions. But it’s also created some apprehension among plans sponsors.
“From a plan fiduciary perspective, there has been some hesitancy—whether warranted or not—about these products,” Malik said. “In particular, plan fiduciaries may worry about how they can ensure that an insurer remains solvent and financially viable decades down the line when it comes time to pay benefits. Plan fiduciaries have also voiced concerns about the administrative feasibility of adding these products to their plans, and portability—meaning, the ability to roll it over to another plan or IRA, if that need comes up.”
Malik said that while he understands the perceived risk, he thinks plan fiduciaries should understand the current laws support rather than discourage the use of lifetime income products. “As participant interest in these products continues to grow, I believe it is important for plan fiduciaries to become familiar with the current laws and other guidance that applies to these products.”
QPAM Exemption
The Department of Labor’s proposed amendment to Prohibited Transaction Exemption (PTE) 84-14, more commonly known as the “QPAM Exemption,” would impose stricter conditions and make it more difficult for managers to avail themselves of one of the most commonly utilized ERISA exemptions.
On July 26, 2022, the DOL proposed amendments to the QPAM Exemption that would modify and expand its ineligibility provisions by clarifying that disqualifying crimes include foreign convictions and by adding new circumstances that would trigger disqualification; require a notice to the DOL of an entity’s reliance on the QPAM Exemption; require that all QPAMs amend their plan or IRA agreements to provide certain indemnification rights in the event of the QPAM’s ineligibility; raise the assets under management, capitalization, and net worth requirements for a QPAM; and make the QPAM Exemption unavailable for any transaction that is not initiated and negotiated solely by the QPAM.
Groom Law Associate Anthony Onuoha , who works on a wide array of ERISA regulatory compliance issues, specifically fiduciary duties and prohibited transactions with respect to plan investments, said the QPAM Exemption is typically viewed as a “one-stop shop” form of exemptive relief for investment managers, as it provides an efficient way for investment managers to comply with ERISA and the Code while engaging in a wide variety of transactions on behalf of ERISA plan clients.
“The proposed amendments to the QPAM Exemption raise significant concerns (1) by raising the risks imposed on asset managers who operate as QPAMs and (2) by potentially shrinking the market for available QPAMs, making it difficult for plan fiduciaries to prudently select a QPAM and/or resulting in increased costs for client plans,” Onuoha said.
Most of the DOL’s activity on the QPAM Exemption in recent years has centered on the criminal disqualification provisions of the exemption, Mayland added. While it was expected that the DOL would address this, “What we did not expect is that the DOL’s proposed amendments could also limit the types of investments or investment strategies the QPAM Exemption would allow,” Mayland said.
Mayland, who testified at the DOL’s hearings on the proposed amendments last October along with Groom Law Principal Kevin Walsh, said the staff appeared to acknowledge that the amendment text was more restrictive as to investments or investment strategies than they may have intended, but added that only time will tell how this issue plays out.
ESG Rule
Another area keeping ERISA attorneys busy lately is the Department of Labor’s controversial Environmental, Social and Governance (ESG) Rule, which took effect on Feb. 1, 2023. The rule clarifies that fiduciaries may consider climate change and other ESG factors when they make investment decisions and when they exercise shareholder rights, including voting on shareholder resolutions and board nominations.
Onuoha noted that ESG investing within the retirement space tends to be highly politicized, and the tenor of DOL guidance and regulations with respect to ESG investing often changes depending on the party in control of the executive branch—generally, Democratic administrations are more expressly open to the consideration of ESG factors than Republican administrations.
“Whether the current ESG rule is here to stay largely depends on the outcome of the 2024 U.S. elections. In any case, plan fiduciaries should be sure to (1) appropriately consider the economic facts and circumstances relevant to an investment decision or course of action, (2) prioritize plan participants’ and beneficiaries’ economic interests in the investment decision-making process, and (3) document its process for arriving at the investment decision or course of action.”
DC Matters
With all the ERISA regulatory activity coming from inside the Beltway, it’s no wonder that ERISA-focused law firms feel it is important to maintain a strong presence in Washington D.C.
Close proximity to the federal agencies that regulate retirement plans helps firms maintain connections that allow for increased visibility into the ever-changing policy landscape.
“We are able to provide a lot of value to our clients by keeping an eye on the DOL’s regulatory agenda as well as legislative developments,” Groom Law Associate Jacob Eigner said. “Consequently, an area we will certainly be keeping an eye on in the future is potential updates to the DOL’s definition of a fiduciary, as well as litigation updates in this area, which has the potential to have a huge effect on regulated entities that make rollover recommendations to clients.”
EDITOR’S NOTE: This article is the cover story from Issue #2 2023 of 401(k) Specialist Magazine Digital Edition. To read the article in magazine format, click here.
SEE ALSO:
• A Closer Look at Biden Administration’s New ESG Rule: Groom Law Group
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
