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Mondress Monaco Parr Lockwood PLLC

2013 Year End Update: Legal Developments Impacting Retirement Plans

  1. The DOL's two significant retirement plan fee and investment disclosure regulations issued in 2010 became applicable in 2012.
    • First, most retirement plans should have received fee disclosures from covered service providers before July 1, 2012. [1] After that, covered service providers must deliver fee disclosures before contracting with a plan (or updating an existing contract with the plan).
    • Second, administrators of participant-directed individual account plans should have first delivered disclosures (including the DOL model comparative chart) to participants and beneficiaries by August 30, 2012, [2] and at least annually thereafter. The plan administrator should also deliver disclosures to plan participants before first investment (for new participants) and after certain changes to previous disclosures. Participants' quarterly statements should reflect fees actually assessed in the preceding quarter. [3]Because delayed effective dates combined with the annual reporting requirement made timing of the participant disclosure awkward, the Department of Labor permits the plan to deliver the second disclosure as late as February 25, 2014. [4]

    Following these fee disclosures, the conservative route for Plan fiduciaries is to review the reasonableness of fees, with the assistance of an ERISA 404-neutral investment expert. [5] An investment expert is neutral if they will not, directly or indirectly, profit by reason of action taken (e.g., investments retained or changed).

  2. For years, excessive fee cases settled before trial. In these cases, the plaintiffs allege that the plan fiduciaries selected more expensive retail share class actively managed mutual funds over less expensive institutional class or indexed funds, thereby paying excessive fees to investment houses. [6] For those that do not settle, plaintiffs are having some success by defeating motions to dismiss and, in a few cases, following bench trials. For example, following trial plaintiffs were awarded more than $35 million for ERISA fiduciary violations, not including attorney's fees and float on cash, in Tussey v. ABB, Inc. [7] The Tussey case is on appeal in the Eighth Circuit. In 2013 the Ninth Circuit in Tibble v. Edison Int'l., et al. [8] upheld a California District Court's finding after a bench trial that the plan's fiduciaries imprudently selected more expensive retail classes of certain mutual funds, without considering cheaper institutional class alternatives.
  3. On December 31, 2012 the IRS updated its correction procedure for technical and operational qualified plan errors, called the Employee Plans Compliance Resolution System (EPCRS). [9] The new procedure includes forms that must accompany a request to the IRS for correction, procedures for finding lost participants and managing "orphan" plans, expanded relief for 403(b) plans, and clarifications to the prior correction procedure on errors such as missed 401(k) plan employer contributions, earnings adjustments, and overpayment corrections.
  4. In September 2012 the IRS eliminated its letter forwarding program to locate missing or nonresponsive retirement plan participants. [10] Legal requirements that plans locate missing participants and inform them of their options before forcing distributions (or rollovers to IRAs, as applicable) have not changed; however, the IRS recognizes that as a practical matter, many retirement plans use commercial search companies.
  5. Many ESOPs and other retirement plans that permit participants to invest in employer stock have a statement in their SPDs that the SPD incorporates by reference documents filed with the Securities and Exchange Commission. This effectively makes SEC filings part of the SPD. [11] Should the plan's fiduciaries be responsible for incorrect statements in the SEC filings, merely because they are incorporated into an ERISA plan's SPD? Yes, in the Sixth and Ninth Circuits. [12]Perhaps, in the Second Circuit. [13]
  6. The Circuit Courts have disagreed about whether a trial court should presume that a plan's investment in the plan sponsor's own stock is prudent, at what point in litigation such a presumption would apply, and the plan language needed for the presumption of prudence to apply. This presumption of prudence is generally referred to as the Moench Presumption , named after a seminal case on the issue. [14] The Department of Labor generally objects to the Moench Presumption. [15] In December 2013 the Supreme Court granted certiorari in one such case, and presumably will resolve the split in the Circuits. [16]
  7. Several compensation and benefits limits change each year because they are tied to a COLA increase. For 2014, the maximum elective deferral stays at $17,500 and the maximum catch-up contribution stays at $5,500. For 2014 the maximum compensation to be taken into account moves from $255,000 in 2013 to $260,000, and the highly compensated employee threshold remains at $115,000. [17]
  8. The IRS expanded retirement plan hardship distribution rules to include Hurricane Sandy-related withdrawals made between October 26, 2012 and February 1, 2013. For plans that opted to permit these withdrawals, amendments were due by the end of the first plan year beginning after December 31, 2012. [18]
  9. In June 2013 the Supreme Court issued a decision invalidating a section of DOMA, the law which generally limited federal recognition of marriages to opposite-sex couples. [19] And so, applicable state law now determines the marital status of same sex couples for federal law purposes. Several agencies, including the IRS [20] and the DOL for purposes of ERISA, [21] have determined that the applicable state is the state where the marriage was celebrated, not the state of residence. So for example, a couple married in Washington but residing in a state that does not permit same sex marriages is, for ERISA qualified retirement purposes, married. ERISA plans should be treating same sex spouses as entitled to the usual spousal retirement plan rights such as pre-retirement death benefits. Read more at http://www.songmondress.com/Articles/June-2013-Supreme-Court-Strikes-DOMA-3.shtml.
  10. At the end of 2013 the IRS issued a notice on in-plan Roth rollovers, permitting conversion of pre-tax retirement plan amounts to after-tax Roth status. [22]> This Notice follows on a 2010 Notice, which addressed in-plan conversions for distributable amounts. [23]
  11. Two Acts of Congress [24]in the last few years and a recent PBGC final rule [25] impact PBGC premiums. In the end, the multiemployer plan per participant premium is $12 in 2014; and for single employer plans both the flat rate and the variable rate premiums (for plans with unfunded benefits) increase in 2014. [26] The PBGC final rule permits sponsors to make one payment for large plans (9 1/2 months after the start of the plan year), rather than the current minimum of two.

From all of us here at MMPL, your employee benefits law firm.

Not intended as legal advice.


[1] 29 CFR § 2550.408b-2(c).

[2] DOL FAB 2012-02 Q/A 35.

[3] 29 CFR § 2550.404a-5(c)(2)(ii).

[4] DOL FAB 2013-02.

[5] See our September 2012 Institutional Investor presentation, After the DOL's Fee Disclosure Rules: Best Practices for Fiduciaries, available at: www.songmondress.com/Articles. Following the Tibble case, discussed infra, fiduciaries should also inquire as to the investment expert's qualifications and scope of review.

[6] Additional allegations regarding selection of investments in 401(k) plans include offering public (mutual) funds rather than separate accounts.

[7] Tussey v. ABB, Inc., No. 2:06-CV-04305-NKL , 2012 WL 1113291 (W.D. Mo. Mar. 31, 2012), amended in part, No. 06-4305-CV-C-NKL, 2012 WL 2368471 (W.D. Mo. June 21, 2012), reconsideration denied, 2:06-CV-04305-NKL, 2012 WL 5512389 (W.D. Mo. Nov. 14, 2012).

[8] Tibble v. Edison Int'l, 729 F.3d 1110 (9th Cir. 2013), affirming the District Court opinion.

[9] Rev. Proc. 2013-12, replacing Rev. Proc. 2008-50.

[10] Rev. Proc. 2012-35.

[11] Of related interest, the new ERISA regulations at 29 USC § 2550.404a-5 and the changes to 29 USC § 2550.404c-1 soften the ERISA requirement that a prospectus be delivered before first investment. ( See 29 USC § 2550.404a-5(d)(4)(i) (prospectus must be delivered upon request)). However, ERISA regulations cannot soften a securities law requirement.

[12] Dudenhoefer v. Fifth Third Bancorp, 692 F.3d 410 (6th Cir. 2012) cert. granted in part, No. 12-751, 2013 WL 6510745 (U.S. Dec. 13, 2013); Harris v. Amgen, Inc., No. 10-56014, 2013 WL 5737307 (9th Cir. Oct. 23, 2013).

13 In re Glaxosmithkline ERISA Litigation, 494 F. App'x 172 (2d Cir. 2012). But see Rinehart v. Akers, 722 F.3d 137 (2d Cir. 2013).

[14] Moench v. Robertson, 62 F. 3d 553 (3rd Cir. 1995). The Second, Third, Fifth, Seventh, and Eleventh Circuits have found that the Moench Presumption applies at the pleadings stage (i.e., before fact finding and trial); the Sixth Circuit has found, in a case that the Supreme Court will likely decide in 2014, that the Moench Presumption applies after pleadings (i.e., at trial); and the Second and Ninth Circuits have found that the Presumption applies only if a plan requires or encourages investment in the plan sponsor's stock.

[15] The DOL filed an amicus brief objecting to the Moench Presumption and urging the Supreme Court to take certiorari of the Dudenhoefer case, supra.

[16] See Dudenhoefer, supra.

[17] IRS News Release IR 2013-86.

[18] IRS Announcement 2012-44.

[19] U.S. v. Windsor, 133 S. Ct. 2675 (2013).

[20] See Rev. Rul. 2013-17.

[21] DOL Technical Release 2013-04.

[22] IRS Notice 2013-74. The Notice also extends the Plan amendment deadline to 2014.

[23] IRS Notice 2010-84.

[24] P.L. 112-141 (July 6, 2012) ("MAP-21"); and HJ Res. 59 (December 26, 2013) ("The Bipartisan Budget Act of 2013").

[25] 79 FR 347 (January 3, 2014), modifying 29 CFR § 4007.11.

[26] The PBGC web page will likely be updated to reflect the increases, http://www.pbgc.gov/prac/prem/premium-rates.html. For example, the flat rate premium for single employer plans is $42 in 2013, $49 in 2014, $57 in 2015, $64 in 2016, and indexed thereafter.