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May 10, 2021 Issue: Spring 2021

2021: Plan Sponsor/Fiduciary Compliance Checklist

By: Hillary E. August and Joseph A. Lifsics, Mayer Brown LLP

Plan sponsors and fiduciaries may have spent 2020 scrambling to amend their plans and operating procedures to accommodate breaking COVID-19 guidance, but the U.S. Department of Labor’s (“DOL”) and federal courts’ wheels continued to turn, churning out decisions and guidance on a variety of ERISA issues—and plan sponsors and fiduciaries should take note. Included in recent DOL guidance are rules for reviewing and selecting retirement plan investments, voting proxies, and distributing retirement plan notices. Meanwhile, various federal appellate court decisions should lead fiduciaries to review summary plan descriptions (“SPDs”) and the inclusion of single-stock fund investment options in defined contribution plan lineups. The following checklist sets out 2020 developments for plan sponsors and fiduciaries to consider in the new year.

Consider whether to add a professionally managed asset allocation fund with a private equity component to your 401(k) plan lineup. In an information letter issued on June 3, 2020, the DOL confirmed that a 401(k) plan fiduciary would not violate the fiduciary’s duty to act prudently solely by selecting a professionally managed asset allocation fund (e.g., a target date fund) with a private equity component as an investment option for a 401(k) plan. While the DOL’s information letter does not set forth a safe harbor, nor would it allow plan participants to invest directly in a private equity fund on a stand-alone basis, it provides significant comfort to plan fiduciaries that a decision to select a target date, target risk, or investment option with a private equity component is not per se imprudent. The DOL’s letter also sets forth guidelines for a prudent fiduciary to follow in making such an investment decision and relevant considerations.

Moreover, the Northern District of California in Anderson v. Intel Corp. Investment Policy Committee, dismissed an action brought by two participants against the Intel Corporation Investment Policy Committee alleging that the Committee’s decision to include private equity, hedge funds and commodities in a custom target date investment option in Intel’s 401(k) plan was imprudent. In reaching its conclusions, the court determined that the plaintiffs failed to provide sufficient authority for their assertion that the level of risk, liquidity and transparency characteristic of private equity makes it imprudent for a 401(k) plan.

Review plan line-ups in light of current litigation trends. After handing down decisions in three ERISA suits during its 2019-2020 session, the Supreme Court appears poised to continue its focus on ERISA this year. In January 2021, the Court asked the plaintiffs to respond to a petition for certiorari filed by the defendants regarding the Fourth Circuit’s decision in Stegemann v. Gannett Company, Inc., 970 F.3d 465 (4th Cir. 2020). And in April 2021, the Court asked the acting Solicitor General to file a brief expressing the views of the United States. In Gannett, the Fourth Circuit held that 401(k) participants had stated a plausible claim for breach of the duty of prudence against plan fiduciaries based on the fiduciaries’ failing to monitor and remove from the plan a single-stock fund—i.e., a plan investment fund consisting of a single class of stock that does not constitute an employer security for purposes of ERISA. Conversely, just three months earlier, the Fifth Circuit granted a motion to dismiss based on similar facts in Schweitzer v. Investment Committee of Phillips 66 Savings Plan, No. 18-cv-20379 (5th Cir. 2020). In March 2021, the Supreme Court asked the defendants in Schweitzer to respond to the plaintiffs’ petition for certiorari.

Prepare to start sending lifetime income disclosures to defined contribution plan participants. The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) created a new requirement that defined contribution plan administrators include a “lifetime income disclosure” with benefit statements at least annually. The statement would set forth the monthly amount of both a qualified joint and survivor annuity (“QJSA”) and a single life annuity (“SLA”) that are each actuarially equivalent to the participant’s total account balance, regardless of whether the participant is married. Congress instructed the DOL to formulate assumptions for converting account balances to lifetime income streams, issue an interim final rule and publish a model disclosure, which the DOL did in September 2020. The DOL issued its interim final rules and a model disclosure on September 18, 2020, which will take effect on September 18, 2021, and will apply to benefit statements furnished after that date. Plan fiduciaries, sponsors, or other parties who used the DOL’s prescribed assumptions and either the DOL’s model language or substantially similar language are protected by a limitation on liability.

Consider updating plan processes for distributing retirement plan notices. Under DOL regulations published in May, retirement plan administrators can take advantage of a new safe harbor to use electronic disclosures to satisfy the disclosure requirements of Title I of ERISA. (The rule does not apply to health and welfare plans.) The new safe harbor includes two significant features. The first is the adoption of an “opt-out,” as opposed to an “opt-in,” procedure for retirement plan e-disclosures: retirement plan administrators can distribute essentially all required Title I ERISA disclosures electronically, even if a participant has not affirmatively consented to receive e-notices and is not “wired at work.” The second allows e-notice to be accomplished either via a “notice and access” method—sending an electronic notice to participants to alert them that a new ERISA disclosure that has been posted on a designated website—or via a direct email with the ERISA disclosure either in the body of the email or as an attachment. To use the new safe harbor, plan administrators must send an initial paper notice to each covered individual and must include specific information in each subsequent e-notice.

Make sure your SPD contains discretionary language. A recent decision by the Tenth Circuit Court of Appeals suggests that plan administrators should confirm their summary plan descriptions give participants adequate notice of the plan administrator’s discretionary authority to decide claims. Applying long-established Supreme Court precedent, lower courts have reviewed a denial of benefits under a deferential arbitrary and capricious standard if the applicable plan gives the plan administrator or fiduciary the discretionary authority to determine eligibility for benefits or to construe the terms of the plan. But in M. v. Premera Blue Cross, 966 F.3d 1061 (10th Cir. 2020), the Tenth Circuit Court of Appeals applied a de novo review standard even though the plan document clearly conveyed discretionary authority to the plan administrator. The court held that deference was not warranted because the plaintiff participants lacked notice of this discretion, given that the summary plan description did not describe the discretionary authority and participants were not provided with a copy of the plan document.  And in April 2021, the Tenth Circuit denied Premera Blue Cross’s petition for rehearing. While it remains to be seen if other courts will adopt this logic, administrators may want to update summary plan descriptions with this discretionary language.

Become familiar with the DOL’s new guidance regarding what constitutes fiduciary investment advice and the new prohibited transaction exemption. In July 2020, the DOL formally readopted the five-part test from 1975, which determines whether a person is a fiduciary by providing investment advice. And in December, it finalized a new prohibited transaction class exemption, “Improving Investment Advice for Workers & Retirees.” In the preamble to the exemption, the DOL provided a more expansive view of when advice would meet the 5-part test and thereby be considered fiduciary investment advice, particularly as it relates to advising plan participants and beneficiaries to roll over plan assets to an IRA or other account. The exemption allows investment advice fiduciaries to receive otherwise prohibited compensation and engage in certain principal transactions, if they adhere to a “best interest” standard of care and certain other conditions are met. Despite delaying the effective date of other Trump-era regulations, the Biden administration allowed this exemption to take effect on February 16, 2021. However, the DOL left open the possibility that it may revise the exemption and the rule defining who is an investment advice fiduciary. Plan sponsors and fiduciaries would be well advised to stay informed about the scope of investment advice fiduciaries’ roles and obligations including the requirements of the new prohibited transaction exemption.

Ensure that investment decisions are based on pecuniary factors. In November 2020, the DOL finalized its “ESG Rule” which requires fiduciaries to compare investment options with other reasonably available investment alternatives with similar risk profiles and to base investment decisions solely on pecuniary factors. Under the rule, fiduciaries are prohibited from considering factors that are intended to benefit the economy or society as a whole. Non-pecuniary factors can only be considered as a “tie-breaker” between two economically similar investments if certain conditions are met. As described below, the DOL recently issued a policy statement that it will not enforce the new rule until it issues new guidance. In light of the current regulatory uncertainty, it is advisable that fiduciaries continue to ensure that, to the extent a plan’s investment guidelines and decision-making processes consider environmental, social and corporate governance (“ESG”) factors, including the use of ESG ratings systems or indexes, such considerations are limited to those factors relevant to the risk or return on the plan’s investment. Under the rule, an investment option cannot be selected as a QDIA if non-pecuniary factors are part of the option’s investment objectives, goals or principal investment strategies, even if its selection as the plan’s QDIA would be based solely on pecuniary considerations.[1]

Update or adopt new proxy voting policies. While prior DOL guidance may have suggested otherwise, the DOL’s “Proxy Voting Rule” regarding shareholder rights explicitly states that that ERISA fiduciaries need not vote all proxies held by an ERISA plan. Instead, fiduciaries should evaluate whether the costs involved in exercising the plan’s shareholder rights outweigh the potential financial benefit to plan participants and beneficiaries. Fiduciaries are also required to consider the material facts underlying the proxy proposal and maintain records regarding the exercise of the plan’s shareholder rights. Plans which utilize proxy advisors need to exercise prudence and diligence in selecting and monitoring such advisors. Accordingly, when choosing (and deciding whether to retain) a proxy advisory firm or related service, a plan fiduciary should assess the provider’s qualifications, qualify of services, reasonableness of fees and any applicable conflicts of interest. The regulation provides examples of two kinds of proxy voting policies which fiduciaries can adopt as a safe harbor. Any such policies would need to be reviewed approximately every two years.

However, in a March 10, 2021 policy statement issued after the Biden administration took office, the DOL proclaimed that it will not enforce or otherwise pursue enforcement actions against a fiduciary for failing to comply with the ESG Rule (described above) or the Proxy Voting Rule. The DOL stated that certain stakeholders, including asset managers, plan sponsors and consumer groups expressed concern over whether these rules accurately reflect a fiduciary’s duties under ERISA and appropriately consider the utility of ESG factors in making investment decisions. As a result, the DOL stated that it intends to “revisit” each of these rules.

While DOL may not be enforcing the ESG Rule or the Proxy Voting Rule, plan fiduciaries should be cautious about taking too much comfort in the DOL’s non-enforcement policy. The DOL’s non-enforcement policy does not revoke or amend the ESG Rule or Proxy Voting Rule, which are final regulations, and would not preclude a plan participant or beneficiary from pursuing private litigation against a plan fiduciary for failure to adhere to these rules. This would be a particular concern for fiduciaries of defined contribution plans, such as 401(k) plans.


[1] The regulation provides that plans have until April 30, 2022 to take action to remove any QDIAs that consider non-pecuniary factors in their investment objectives, goals or principal investment strategies.

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