Fiduciary Issues

Representative Greg Murphy (R-NC), along with co-sponsor Representatives Carol Miller (R-WV), David Schweikert (R-AZ), and Lloyd Smucker (R-PA) have introduced HR 9198, the Safeguarding Investment Options for Retirement Act.

The bill would require plan fiduciaries to base investment decisions on only pecuniary factors. A fiduciary is not prohibited from considering an investment option that promotes nonpecuniary benefits so long as participant interests are not subordinated to other objectives or additional financial risks related to nonpecuniary factors. Additionally, such investment cannot be a default investment for the plan. The term pecuniary factor means a factor that a fiduciary prudently determines is expected to have a material effect on the risk and return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy established under ERISA.

The bill would further amend the Internal Revenue Code to require that if a trust contains investment options with nonpecuniary factors, such trust shall also include investment options based solely on pecuniary factors in order to be qualified.

FINRA has issued a $5,000 fine and six-month suspension against a former registered representative for “recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore not in the customer’s best interest."

The Office of Management and Budget has received a proposed rule from the Department of Labor (DOL) titled “Adoption of Amended and Restated Voluntary Fiduciary Correction Program”. The Voluntary Fiduciary Correction Program (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.

A plaintiff in a 401(k) plan sponsored by Colgate-Palmolive Co. has filed a lawsuit against several parties after an unknown individual defrauded the plan of her entire $750,000 account. The plaintiff has named the plan sponsor, the recordkeeper Alight Solutions, and the plan trustee Mellon Bank, as defendants in the lawsuit. The plaintiff alleges the parties breached their fiduciary duty by failing to safeguard her assets.

The Department of Labor (DOL) has issued Compliance Assistance Release 2022-01 pertaining to the use of cryptocurrencies as plan investments in 401(k) plans. In it, the DOL cautions fiduciaries to exercise extreme care before considering the addition of cryptocurrency options in a plan’s investment menu and elaborates that the failure to remove an imprudent investment option from a menu of options is a breach of fiduciary duty.

The DOL expresses concerns about significant risks and challenges related to fraud, theft, and loss due the following factors

• Speculative and volatile investments due to early stage of development
• Ability for participants to make informed investment decisions due to the unique nature of cryptocurrencies and lack of investor knowledge
• Custodial and recordkeeping concerns related to the asset not being held in a trust or custodial account but rather, stored as “lines of computer code in a digital wallet”
• Valuation concerns with reliability and accuracy, citing disagreements by experts
• Evolving regulatory environment that could result in unlawful transactions or inadequate disclosures

The DOL intends to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products—including those within brokerage windows and take “appropriate action” to protect the interests of plan participants and beneficiaries.

December 22, 2021 – The Department of Labor’s Employee Benefit Security Administration (EBSA) has issued a supplemental statement to a June 2020 Information Letter. The letter addressed whether plan fiduciaries should offer private equity investments as investment options in individual account defined contribution plans. The 2020 letter indicated that such plans could potentially include managed asset allocation funds with a private equity component, but pointed out that a plan fiduciary should take into account whether it is prudent to include such an investment, particularly if it is a component of a plan’s qualified default investment alternative (QDIA).

The Department of Labor (DOL) has extended the transitional relief under Field Assistance Bulletin (FAB) 2018-02 and provided additional temporary non-enforcement guidance related to specific provisions of Prohibited Transaction Exemption (PTE) 2020-02 in FAB 2021-02.

Last week, President Biden issued an Executive Order on Climate-Related Financial Risk, which includes a directive to the Department of Labor (DOL) Secretary to consider publishing, by September 2021, a proposed rule to suspend, revise, or rescind the Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights final rules that were published during the Trump administration regarding environmental, social, and governance (ESG) investments and proxy voting by employee benefit plans.

Objective investment advice. Simple concept, right? And most everyone agrees that every saver and retirement investor is entitled to this. But ensuring that individuals have access to objective investment advice is easier said than done. In fact, the Department of Labor (DOL) has been trying to make this happen since the 1970s, when it first released a five-part test to help determine whether investment professionals owed their clients a duty to provide objective advice.

Recent cyberattacks have gotten a lot of attention. Some of these hacks have created turmoil through a broad swath of the business community. But another widespread menace threatens our financial security. In fact, even as you read this, the global threat of cybercrime continues around the clock as criminals try to steal retirement plan assets.