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Fiduciary Update

Fiduciary Update | May 2019

In this quarter’s Fiduciary Update, CAPTRUST’s Drew McCorkle provides a look at what is trending for fee and investment performance cases. Also covered is the potential for a cascade of fee cases in the healthcare arena, along with a reminder to benefits departments about providing information to plan participants.

Fee and Investment Performance Cases: The Trend Continues

Several more claims alleging fiduciary breaches in the overpayment of investment and recordkeeping fees and retention of underperforming funds have concluded. The results are aligned with those we have seen before. Some were settled—with significant settlement amounts. Those that went to trial—or were resolved on motions—favored the plan fiduciaries, based on the processes followed for investment selection and monitoring as well as fee monitoring.

Selected settlements include:

  • Anthem—$23.65 million
  • Franklin Templeton—$13.85 million
  • Vanderbilt University—$14.5 million
  • Safeway—Terms not yet disclosed

Settlements in these cases usually involve plan fiduciaries’ ongoing obligations to take actions such as:

  • Conduct a competitive request for proposal (RFP) process for recordkeeping services;
  • Price plan recordkeeping services on a flat per-participant basis rather than a percentage-of-assets basis; and
  • Retain an independent investment advisor to assist the committee with investment election and monitoring.

However, opening a new window on settlement terms, the Vanderbilt University settlement stipulates that plan data will not be used by plan service providers to cross-sell unrelated services to plan participants. Vanderbilt is required to direct the plan recordkeeper—Fidelity, in this instance—to refrain from using any data gathered in plan servicing operations to sell unrelated services to plan participants.

Process Prevails for American Century—American Century was sued for using exclusively American Century investments in its 401(k) plan, not including any indexed investments, leaving underperforming funds on the watch list for too long, and overpaying for investments, among various other claims.

The court reviewed the governance process employed by American Century’s fiduciary committee in an 11-day trial. Most committee members testified at trial. The committee’s governance process demonstrated that investment and cost decisions for the plan were carefully considered and thoughtfully decided. The committee’s process included meeting at least three times a year, and each committee member received fiduciary training. All claims were decided in favor of the plan fiduciaries. Wildman v. American Century Services, LLC (W.D. MO 2019)

Oracle Wins Fee Claims Based on Process—Fiduciaries of Oracle’s 401(k) plan were sued, alleging failure to monitor plan costs and overpayment of recordkeeping fees. The evidence demonstrated that the fiduciary committee met quarterly and regularly reviewed fees. Additionally, over time, fees were addressed with the recordkeeper and reduced. The court found in favor of the fiduciaries on this claim and rejected the argument that plan fiduciaries are required to periodically engage in competitive bidding. The issue for plan fiduciaries is to avoid overpaying for services. Traudt v. Oracle Corporation (D. CO 2019)

Process Carries the Day for CenturyLink—CenturyLink’s 401(k) plan included a large-cap stock fund that had underperformed its benchmark by more than 2 percent per year since 2012. The complaint alleged a fiduciary breach in not replacing the fund, citing a T. Rowe Price fund that would have produced a 5 percent higher annual return over the same period.

Dismissing this claim, the court noted that:

  • There was no allegation that the committee’s process failed to properly monitor the fund’s underperformance, and the possibility of having an outperforming fund was focused “on outcome rather than process”;
  • “Relative underperformance is insufficient to state a breach of fiduciary duty claim,” and there was no allegation that remaining with the fund was unreasonable after weighing other factors; and
  • Absolute returns of 11 percent per year in the challenged fund since inception supported its retention.

Birse v. CenturyLink Investment Management Company (D. CO 2019)

Health Plan Fiduciaries Win Excessive Fees Claim by the DOL: Process Succeeds

Fiduciaries of an employer-provided health plan were sued by the Department of Labor (DOL) for violating ERISA in charging excessive fees for health benefits. Suits of this type are unusual, and it is not known how the suit came to the DOL’s attention. Key elements of the DOL’s evidence were comparing the fees of the challenged plan to national fee data assembled by the DOL from plan administrators’ annual Form 5500 filings. The allegations in the case are similar to those that have become familiar in 401(k) fee litigation.

The court largely discounted the DOL’s Form 5500 evidence. The plan sponsor is in a unique business with a unique participant population, so the court preferred the plan fiduciaries’ record of benchmarking fees with viable providers and speaking with other plan sponsors with similar plan needs. In a familiar refrain, the courts said, “Prudence is not measured in hindsight. The prudent person standard is not concerned with results; the proper test is not the result but what actions and processes [the plan fiduciaries] undertook at the time of the challenged decision.” Acosta v. Chimes District of Columbia, Inc, (D. MD 2019)

It remains to be seen whether this case will result in similar claims by private litigants. Notably, unlike retirement plans, health plans are not obligated to annually report fees under ERISA section 408(b)(2). So, it is a good practice for plan sponsors and fiduciaries to annually request statements from their providers of all direct and indirect fees paid and received in connection with their health and other benefit programs.

Great-West Not a Fiduciary in Setting Stable Value Crediting Rate

A participant in one of more than 13,000 retirement plans that use the Great-West Key Guaranteed Portfolio Fund (KGPF) sued, alleging that Great-West breached its fiduciary duties by setting the quarterly crediting rate on that fund too low. The suit was a class action on behalf of more than 270,000 plan participants. No plan sponsors or plan fiduciaries were part of the suit.

The KGPF is a general account product. That is, Great-West invests participant money directed to the KGPF in its general account, where it is invested primarily in corporate and government bonds and mortgage-backed securities. Each quarter, Great-West sets the crediting rate on the KGPF, which is lower than the return expected on its general account. Participants receive the crediting rate, and Great-West retains the difference, the spread. The claim alleged that Great-West’s ability to set the crediting rate made it a fiduciary under ERISA and setting the crediting rate lower than the amount earned on the general account was a fiduciary breach.

The district and appellate courts found that Great-West was not a fiduciary in setting the crediting rate. The agreed terms of the KGPF contract include Great-West’s right to set the crediting rate, and, if participants or plan fiduciaries do not like the crediting rate, they can exit the investment. Teets v. Great-West Life & Annuity Insurance Company (10th Cir. 2019)

This case is a good reminder that few providers to retirement plans take on a fiduciary role, so it is incumbent on fiduciaries to protect participants’ interests.

Plan Sponsor Must Pay Life Insurance Benefit to Employee’s Estate

As part of her benefits package, an employee received basic life insurance equal to her annual salary and had the option of buying additional life insurance, which she did. The employer paid for basic life insurance and the employee paid for the additional insurance through payroll deduction. In mid-2015, the employee was diagnosed with breast cancer and soon went out on disability for several months for surgery and treatment. She returned to work part-time in the fall of 2015 but was unable to work after the summer of 2016. She died in the summer of 2017.

The person at her employer responsible for insurance premium payments assured the employee that all premiums would continue to be paid after she became ill, so her insurance coverage would remain in force. As promised, after she stopped working and receiving a paycheck, the employer continued to pay the premium for the additional insurance. The insurance company accepted the payments.

After the employee’s death, the insurance company refused payment of the life insurance proceeds. The insurance policy stated that coverage would stop on the last day of the month in which the employee no longer worked at least 40 hours a week. The employee’s estate sued both the insurance company and the employer. The estate argued that the insurance company could not deny coverage after accepting premiums. And alternatively, if the insurance was not in force, the employer should pay because it assured the employee that the coverage would be maintained.

The court found that the insurance company was not obligated to verify eligibility for coverage before accepting premiums. Rather, that was the employer’s responsibility. And acceptance of premiums on an ineligible insured did not obligate the insurer to provide coverage. However, the court found that the employer breached its fiduciary duty to the employee by making the material misrepresentation that her life insurance would be continued. Because the employee relied on the employer’s misrepresentation, the employer was found to be liable to pay the employee’s estate an amount equal to the promised life insurance coverage. McBean vs. United of Omaha Life Insurance Company (S.D. CA 2019)

Participant Accounts Still in the Plan One Year after Departure Likely to Remain

It is not unusual for 30 to 40 percent of a given 401(k) plan’s assets to belong to former employees, as reported by Alight Solutions. If plan accounts have not been distributed within a year after departure, they are likely to remain.

Some plans are in a net outflow position with baby boomers retiring and current contributions not replacing distributions. If former employees leave their money in the plan, it is beneficial for both the plan and the participant. The plan retains assets and buying power; the plan participant receives the benefit of investments overseen by independent advisors, with much lower investment fees than typically available in individual retirement accounts (IRAs). The Alight study also indicates that participants age 60 and older are more likely to leave money in the plan if it includes the option to take installment distributions.

Fiduciaries should consider:

  • Their recordkeeper’s participant messaging on distributions (i.e., is leaving the money in the plan a prominent alternative?); and
  • Are former employees permitted to take installment distributions—or are they required to take a lump sum?

A related practical issue for plan fiduciaries to raise is the cost to participants of taking installment distributions after they have stopped working at the plan sponsor.