Fiduciary Issues

On November 11, 2022, Juniper Networks, a computer hardware manufacturer, agreed to settle a lawsuit by participants in a 401(k) plan it sponsors for $3 million. The lawsuit alleged that the plan offers managed account services which provide almost no value to the participants but came with a large fee. The plaintiffs contended that the fee of 65 basis points was more than triple what participants paid in similar-sized plans. They also argued that the services should have been a flat rate as the work required to offer the service does not increase as the account assets increase. This was one of many similar lawsuits filed against large plan sponsors where the plaintiffs were represented by the law firm of Walcheske & Luzi in the past two years.

The Pension Benefit Guarantee Corporation has updated the ERISA Section 4044 Mortality Table to now include factors for 2023 valuation dates. This mortality table is used to determine the present value of annuities in involuntary terminations and distress terminations of single-employer plans. The web page also includes updates to a unisex version of the table that is used in determining benefit transfer amounts under the missing participant program in accordance with ERISA Section 4050. 

A final rule titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights submitted by the Department of Labor has left the Office of Management and Budget.

The final rule is pursuant in part to Executive Order 14030, which directed the Secretary of Labor to suspend, revise or rescind previous guidance on this matter promulgated during the Trump administration. A proposed rule was published in the Federal Register on October 14, 2021.

Participants in a 401(k) plan sponsored by The Massachusetts Mutual Life Insurance Company (MassMutual) have sued the sponsor for breach of fiduciary duty to the plan. The plaintiffs claim that by offering MassMutual’s own proprietary funds for the plan, the sponsor put its own interest ahead of plan participants. They argue that almost no similarly sized plan sponsors offer those funds, and that there were identical investments with cheaper share classes available that the sponsor should have selected instead.

They also argue that the sponsor improperly retained Empower as the recordkeeper. MassMutual had been a recordkeeper and conducted all recordkeeping for the plan in house. It sold its recordkeeping business to Empower effective Jan. 1, 2021.

After the sale, the sponsor elected to hire Empower as the recordkeeper, and kept it in that position until May 2022, when it hired a less expensive recordkeeper. The plaintiffs contend that MassMutual improperly offered Empower the right to serve as recordkeeper of the plan as an inducement to the sale.

The Pension Benefit Guaranty Corporation (PBGC) is extending the comment period for a proposed rule that would provide interest rate assumptions that may be used by a plan actuary in determining a withdrawing employer’s liability under a multiemployer plan. PBGC published the proposed rule in the Federal Register on October 14, 2022, with a comment period that was scheduled to end on November 14, 2022. After receiving a request to extend the comment period to provide a total of at least 60 days from October 14, 2022, PBGC is extending the comment period through December 13, 2022. Release of the proposed rule was previously announced.

The Securities and Exchange Commission (SEC) has released a proposed rule titled “Open-End Fund Liquidity Risk Management Programs and Swing Pricing; Form N-PORT Reporting.”

The Pension Benefit Guarantee Corporation (PBGC) has submitted to the Office of Management and Budget an information collection request and extension related to Form 5500 series annual reporting requirements. Specifically, the request proposes modifications to Schedule R, Retirement Plan Information, and Schedule SB, Single-Employer Defined Benefit Plan Actuarial Information.

A Department of Labor proposed rule restating the Voluntary Fiduciary Correction Program (VFCP) has left the Federal Office of Management and Budget—suggesting that official release may come soon.

The VFCP is a voluntary enforcement program that allows plan officials to identify and correct certain transactions, such as delinquent participant contributions, sales and exchanges, improper loans, and improper plan expenses. The VFCP was last updated in 2006.

The Securities and Exchange Commission (SEC) has released a final rule to amend requirements for shareholder reports for mutual funds and exchange-traded funds (ETFs) and rules for investment company advertisements. The SEC has identified in its press release several highlights of the final rule.

Shareholder Reports Tailored to the Needs of Retail Shareholders

The Commission’s final rule amendments will require mutual funds and ETFs that are registered on Form N-1A (“open-end funds” or “funds”) to transmit to shareholders concise and visually engaging annual and semi-annual reports that highlight information that is particularly important for retail shareholders. The final rule amendments also facilitate funds’ ability to make electronic versions of their shareholder reports more user-friendly and interactive.

Availability of Additional Information on Form N-CSR and Online

The new rules will require that funds make available online certain information that may be more relevant to investors and financial professionals who desire more in-depth information. This information also must be delivered free of charge upon request and filed on a semiannual basis on Form N-CSR. This information includes, for example, a fund’s schedule of investments and other financial statement elements.

Amendments to the Scope of Rule 30e-3 to Exclude Open-End Funds

The SEC adopted amendments to exclude open-end funds from the scope of rule 30e-3, which generally permits certain registered investment companies to satisfy shareholder report transmission requirements by making these reports and other materials available online and providing a notice of the reports’ online availability, instead of directly providing the reports to shareholders.

Fee and Expense Information in Investment Company Advertisements

The final rule amendments require that presentations of investment company fees and expenses in advertisements and sales literature by registered investment companies and business development companies be consistent with relevant prospectus fee table presentations and be reasonably current. The rule amendments also address representations of fees and expenses that could be materially misleading.

The final rule amendments will become effective 60 days after publication in the Federal Register. The SEC is providing an 18-month transition period after the effective date of the final rule amendments to allow open-end funds adequate time to adjust their shareholder reports and comply with the rule 30e-3 changes. The SEC is also providing an 18-month transition period after the effective date to comply with the final rule amendments to the advertising rules. The final rule amendments that address representations of fees and expenses that could be materially misleading apply on the effective date.

The Securities and Exchange Commission (SEC) has released a proposed rule to prohibit investment advisers from outsourcing certain services or functions without first meeting due diligence and ongoing monitoring requirements related to the “covered function”. A covered function is a function or service that is

• necessary to provide advisory services in compliance with federal securities laws, and
• if not performed or performed negligently, would be reasonably likely to cause a material negative impact on the adviser’s clients or on the adviser’s ability to provide investment advisory services.

The SEC is providing examples of potential covered function categories an adviser may wish to consider in the amendments they are proposing to Form ADV, Section 7.C of Schedule D. Covered functions listed would include: Adviser/Subadviser; Client Services; Cybersecurity; Investment Guideline/Restriction Compliance; Investment Risk; Portfolio Management; Portfolio Accounting; Pricing; Reconciliation; Regulatory Compliance; Trading Desk; Trade Communication and Allocation; and Valuation.

The proposal would also require advisers to obtain reasonable assurances that a third party recordkeeper will meet four standards which address the third party’s ability to

• adopt and implement internal processes for making and/or keeping records that meet recordkeeping rule requirements applicable to the books and records being maintained on behalf of the adviser;
• make and/or keep records that meet all of the requirements of the recordkeeping rule applicable to the adviser;
• provide access to electronic records; and
• ensure the continued availability of records if the third party’s relationship with the adviser or its operations cease.

Comments should be received on or before 30 days after publication in the Federal Register or December 27, 2022, whichever is later.