Employee Benefits & Executive Compensation Blog

The View from Proskauer on Developments in the World of Employee Benefits, Executive Compensation & ERISA Litigation

District Court Dismisses Investment and Recordkeeping Claims Against 401(k) Plan Fiduciaries

A Kentucky federal district court ruled that a participant in CommonSpirit Health’s 401(k) plan failed to state plausible claims for breach of fiduciary duty related to the fees and performance of actively managed target date funds and recordkeeping fees.

The court first rejected plaintiff’s claim that the plan fiduciaries should have offered a passively managed target date suite in lieu of a more expensive and underperforming actively managed target date suite because “actively managed funds and passively managed funds are not ideal comparators.”  The court also concluded that, even if the index funds were a viable comparator, there was no reason to infer a breach on account of the fact that:  (i) the actively managed funds underperformed by less than 1%; and (ii) plaintiff’s reliance on a five-year “snapshot” of the actively managed funds’ underperformance was “relatively short” and excluded the funds’ later outperformance of the chosen benchmark.  Similarly, the court dismissed plaintiff’s claims that two other actively managed funds underperformed for failure to provide meaningful benchmarks.  Lastly, the court also disposed of plaintiff’s claims that, as a whole, the plan’s investment options were too expensive and that the plan’s recordkeeping fees were too high.  In so ruling, the court explained that the plaintiff failed to provide an accurate calculation of the expenses and failed to identify another recordkeeper that would have been willing to conduct the same services for a lesser amount.

Before addressing the plaintiff’s allegations, the court rejected defendant’s argument that the plaintiff lacked Article III standing to bring claims related to investment options in which she did not invest because, in the court’s view, the claims were brought on behalf of the plan participants and alleged similar misconduct.

The case is Smith v. CommonSpirit Health, No. 20-cv-95, 2021 WL 4097052 (E.D. Ky. Sept. 8, 2021).

EPCRS Update Offers New Tools to Correct Retirement Plan Errors

The IRS recently updated its “Employee Plans Compliance Resolution System” (EPCRS).  By way of background, EPCRS is a correction program administered by the IRS for plan sponsors to correct certain retirement plan errors.  EPCRS is comprised of three different components: the Self-Correction Program, the Voluntary Correction Program, and the Audit Closing Agreement Program.

The updated version of EPCRS, which was published in Revenue Procedure 2021-30, supersedes the prior version of EPCRS.  Plan sponsors and administrators should familiarize themselves with the EPCRS changes, which are generally effective July 16, 2021.  The following provides an overview of some of the significant changes made to EPCRS.

New Flexibility to Correct Retirement Plan Overpayments

Correcting retirement plan overpayments—which occur when a retirement plan has paid more to a participant or beneficiary than permitted under the terms of the plan—can be a hassle.  Under EPCRS, plan sponsors are charged with recouping overpayments from participants and beneficiaries, or, if that fails, making a corrective contribution to the plan in the amount of the overpayment.  Any overpayment reimbursements must be adjusted for earnings.

To simplify the process of correcting overpayments from well-funded defined benefit plans, the EPCRS update provides two new alternative correction methods for defined benefit plan overpayments: (1) the funding exception correction method, and (2) the contribution credit correction method.  To rely on either method, the overpayment cannot be associated with a qualified plan limit failure, nor can the overpayment recipient be a disqualified person.  Each method is explained in more detail below.

  • Funding exception correction method: This method provides that no corrective payment with respect to an overpayment is required, provided that the plan meets certain funding levels. To rely on this method, the plan must meet the following funding levels as of the date of correction:  (1) For a single employer plan, the plan’s certified or presumed adjusted funding target attainment percentage (AFTAP) is at least 100%, and (2) For a multiemployer plan, the plan’s most recent annual funding certification indicates the plan is in the “green zone.”  Future benefit payments must be reduced to the correct payment amount.  In addition, if a plan sponsor relies on this method, the plan sponsor cannot seek additional corrective payments related to the overpayment from any party (including the overpayment recipient, and, any spouse or beneficiary of an overpayment recipient).
  • Contribution credit correction method: This method reduces the corrective payment that would otherwise be required to be made with respect to the overpayment by a “contribution credit.” At a high level, the contribution credit comprises two parts: (1) the amount by which the overpayment amount has already been reflected in an increase in the required minimum funding contribution to the plan, and (2) certain additional contributions in excess of minimum funding requirements paid to the plan after the date of the overpayment.  If the contribution credit exceeds the amount of overpayment, no corrective payment to the plan is due and the plan sponsor cannot seek additional corrective payments from any party (including the overpayment recipient, and, any spouse or beneficiary of an overpayment recipient). If a net overpayment remains after application of the contribution credit, the plan sponsor or another party must take further corrective action to reimburse the plan for the remaining overpayment.  Like the funding exception method, future benefit payments must be reduced to the correct amount.

Both of the new overpayment correction methods described above are optional.  Consistent with the prior version of EPCRS, plan sponsors may continue to correct overpayments by recovering the amount of the overpayment from the overpayment recipient and contributing that amount to the plan (adjusted for earnings).  However, to the extent that recoupment of overpayments has proved impractical or time-consuming, the updated version of EPCRS provides useful tools to correct well-funded defined benefit plan overpayments.

In addition to the changes related to the correction of defined benefit plan overpayments summarized above, the EPCRS update makes two overpayment correction changes that apply to retirement plans generally, which are summarized below:

  • Increase to small overpayment limit: The threshold for small retirement plan overpayments for which no correction is required is increased from $100 to $250. This increase potentially reduces the correction burden for plans with large numbers of small overpayments.
  • Repayment through installment agreement: Plan sponsors seeking to recoup overpayments from recipients may now permit the recipient to make repayment through an installment agreement, in addition to a single lump sum. This change should provide additional flexibility for recipients to reimburse plan overpayments.

Expansion of Self-Correction Program

The Self-Correction Program (SCP) under EPCRS permits plan sponsors to correct certain failures without IRS involvement or approval (and without compliance fees).  The updated version of EPCRS provides additional flexibility for plan sponsors to use SCP by extending the period during which plan sponsors can correct significant failures under SCP by an additional year, as well as by expanding the eligibility requirements to correct certain operational errors by retroactive plan amendment.  These changes are discussed in more detail below.

  • Self-correction period for significant failures extended by one year: Under the prior version of EPCRS, “significant” failures were eligible for correction under SCP during the period ending on the last day of the second plan year following the plan year in which the failure occurred. The EPCRS update extends the SCP period by an additional year to the last day of the third plan year following the plan year in which the failure occurred.  This provides additional time for plan sponsors to correct significant failures under SCP.  Relatedly, because the EPCRS safe harbor correction methods for certain employee elective deferral failures are keyed to the SCP correction period, this one-year extension also extends the availability of the safe harbor correction method for those failures.
  • Expanded self-correction by retroactive plan amendment: EPCRS allows plan sponsors to correct certain operational failures by adopting a retroactive plan amendment to make the terms of the plan conform to its operation—provided that the amendment results in an increase to a benefit, right, and feature (BRF) that applies to all eligible employees. The EPCRS update eliminates the requirement that the increased BRF apply to all eligible employees, making it possible to correct additional types of errors by retroactive plan amendment under SCP.
  • Extension of automatic enrollment safe harbor correction sunset date to December 31, 2023: Certain 401(k) plans provide for “automatic enrollment,” whereby employees are deemed to automatically enroll in the plan at a specified deferral rate. Under the prior version of EPCRS, errors relating to implementation of a plan’s automatic enrollment feature could be corrected without making the qualified nonelective contribution that would otherwise be required for the missed deferral opportunity (assuming certain notice and timing requirement were met), provided the error first occurred on or before December 31, 2020. Effective January 1, 2021, the EPCRS update extends the sunset date for this correction method to errors first occurring on or before December 31, 2023.

Elimination of Anonymous VCP Submissions, Addition of Pre-Submission Conference

Plan sponsors may utilize the Voluntary Correction Program (VCP) for errors not eligible for correction under the Self-Correction Program.  Filing a VCP application permits a plan sponsor to apply to the IRS for approval of the proposed correction method.  For several years, VCP has included an optional “anonymous” submission process whereby plan sponsors could submit VCP applications without identifying information, meaning that the IRS could approve the proposed correction before learning the sponsor’s identity.  Effective January 1, 2022, the anonymous VCP submission process is eliminated.

Instead, effective January 1, 2022, plan sponsors may submit a request for an anonymous pre-submission conference with the IRS regarding any proposed correction method that is not a “safe harbor” correction method under EPCRS.  Any request must be written and include all relevant facts.  If the conference request is granted, the IRS will provide verbal feedback about the proposed correction method; however, any feedback is advisory only and not binding on the IRS in any future VCP application regarding the issues discussed at the conference.

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The EPCRS update includes significant new tools for plan sponsors to correct common retirement plan errors.  Plan sponsors and administrators should familiarize themselves with the new rules, and evaluate whether any ongoing correction projects started under the prior version of EPCRS should be adjusted to reflect the EPCRS update.

[Podcast]: Special Financial Assistance for Multi-employer Pension Plans (Part 2)

proskauer benefits brief podcastThis episode of The Proskauer Benefits Brief is the second of our three-part series analyzing the Pension Benefit Guaranty Corporation (PBGC) guidance on the new special financial assistance program for troubled multiemployer pension plans that was created by the American Rescue Plan Act (ARPA).  Tune in as Rob Projansky and Justin Alex dig into more details on the guidance and the program.

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District Court Partially Dismisses ERISA 401(k) Fee and Performance Claims for Lack of Standing

A federal district court in New York recently granted Omnicom Group Inc.’s (“Omnicom’s”) motion to dismiss, for lack of Article III standing, claims challenging the offering of investment options in Omnicom’s 401(k) plan in which the plaintiff participants did not invest.  The court denied Omnicom’s motion to dismiss, however, with respect to the remainder of the claims, which alleged that Omnicom’s administrative committee breached its fiduciary duties under ERISA by including allegedly costly and underperforming funds in its 401(k) plan, causing the plan to pay excessive recordkeeping fees and offering an investment lineup that was overly expensive.

With respect to the standing argument, the court first rejected defendants’ reliance on the Supreme Court’s recent decision in Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020), which held that participants in a defined benefit plan do not have standing to sue when they personally suffered no monetary injury. The court concluded that it was of “decisive importance” that Thole involved a defined benefit plan as opposed to a defined contribution plan, like the one at issue here.  Nevertheless the court held that this did not change the fact that a plaintiff must allege and show that she has been personally injured to demonstrate injury-in-fact as required under Article III. Relying on analogous case law from the Second Circuit, the court concluded that a plaintiff in a defined contribution plan who does not personally invest in a challenged fund lacks Article III standing to sue.

In so ruling, the court rejected the notion that plaintiffs suing derivatively on behalf of a plan under ERISA § 502(a)(2) automatically have standing. The court explained that a plaintiff must assert both a cause of action under ERISA and a constitutionally cognizable injury-in-fact. Since plaintiffs could not have suffered an injury from the alleged mismanagement of funds in which they did not invest, the court concluded that plaintiffs could not demonstrate the requisite injury. Similarly, the court concluded that merely because plaintiffs filed their lawsuit as a class action did not change the analysis because the requirements of Article III are “no less true with respect to class actions” than with other suits. Finally, despite its finding that Thole was inapplicable, the court did cite Thole for its statement that “there is no ERISA exception to Article III.”

The court then concluded that plaintiffs can only seek relief with respect to funds in which they were invested.  The court did, however, allow plaintiffs to challenge the entire suite of target date funds even though plaintiffs invested in only five of the thirteen funds, because the funds were all part of the same product line.

With respect to the claims for which plaintiffs had standing, the court rejected defendants’ arguments for dismissal.  It concluded that plaintiffs stated a claim for imprudence with respect to the suite of target date funds because plaintiffs sufficiently alleged that the funds charged higher fees, or underperformed relative to comparable funds.  In so ruling, the court referenced what it found to be the trend among courts in the Second Circuit to defer deciding whether the complaint identified suitable comparator funds until after discovery. For the same reason, the court declined to dismiss plaintiffs’ claim that the overall investment menu was overly expensive.

The court also declined to dismiss plaintiffs’ claim that the plan paid excessive recordkeeping fees because, it found, plaintiffs provided sufficient evidence that comparable plans paid lower fees and defendants’ arguments to the contrary were more appropriately evaluated after discovery. Finally, the court allowed plaintiffs’ failure to monitor and knowing breach of trust claims to proceed because plaintiffs plausibly alleged an underlying breach of fiduciary duty and that defendants knew or should have known of the alleged breaches.

View from Proskauer

The court’s ruling on the standing issue is potentially significant because plaintiffs frequently challenge the prudence of funds in which they did not personally invest. It is unclear how helpful it will ultimately prove to be, however, because many courts have already ruled that plaintiffs do have standing to challenge funds in which they did not invest. Hopefully, courts examining fresh challenges on standing grounds will follow this court’s lead, given the thorough and persuasive manner in which the court presented its rationale for the ruling.

The case is In re Omnicom ERISA Litig., No. 20-cv-4141 (S.D.N.Y. Aug. 2, 2021).

Fifth Circuit Holds Participants Lack Standing To Challenge Plan Investment Options

The Fifth Circuit affirmed the dismissal, for lack of standing, of a fiduciary breach representative action against American Airlines and its 401(k) plan investment committee.  Ortiz v. American Airlines, Inc., No. 20-10817, 2021 WL 3030550 (5th Cir. July 19, 2021).  As discussed in an earlier post, two former American Airlines employees brought this suit in 2016 on behalf of the American Airlines 401(k) plan, alleging that the plan fiduciaries’ investment decisions breached their fiduciary duties of loyalty and prudence and violated ERISA’s prohibited transaction rules.  In particular, plaintiffs alleged the defendants imprudently selected and retained a demand-deposit fund—sponsored and managed by American Airlines Federal Credit Union—as a plan investment option instead of a stable value fund, which had a higher rate of return.  Both named plaintiffs invested in the credit union fund but did not invest in a stable value fund that was added to the plan’s investment menu during the relevant statutory period.

Last year, a judge in the Northern District of Texas dismissed the case, holding that plaintiffs lacked Article III standing to pursue their claims.  In so holding, the court explained that any harm from defendants’ failure to offer a stable value fund was speculative since:  (i) plaintiffs did not show they would have invested in a stable value fund had it been available to them; and (ii) even when it did become available, plaintiffs did not invest in it.

The Fifth Circuit agreed with the district court’s conclusion that the plaintiffs lacked standing to bring their claims, but employed slightly different reasoning.  At the outset, the Court rejected the application of a recent Supreme Court case, Thole v. U.S. Bank N.A., 140 S. Ct. 1615 (2020), to the issue of whether plaintiffs suffered a cognizable injury for purposes of Article III standing.  The Court wrote that the defendants could not rely on Thole to argue that plaintiffs did not suffer a concrete injury because the Supreme Court “explicitly drew a distinction” between the defined benefit plan at issue there—in which participants’ entitlements to benefits are fixed independent of fiduciaries’ investment decisions—and defined contribution plans such as the American Airlines 401(k) plan, in which participants’ benefits are tied to their account value and thus to plan fiduciaries’ investment decisions.

The Fifth Circuit’s decision instead focused on the causation prong of the Article III standing analysis.  Unlike the district court, the Court did not focus only on whether plaintiffs would have invested in a stable value offering if one was available, but on whether plaintiffs would have done so if, counterfactually, the plan never offered the demand-deposit option at all.  Here, because plaintiffs did not transfer out of the demand-deposit fund even when a stable value option became available, the Court found it unlikely that plaintiffs would have invested in a stable value option even if the demand-deposit fund was never available.  Accordingly, the Court held that to the extent plaintiffs suffered injuries, those injuries were caused by their own investment decisions and not by defendants.

Proskauer’s Perspective

Ortiz is notable because it appears to be the first appellate court to consider whether Thole’s holding applies in the defined contribution plan context.  The decision is also notable for its causation analysis for purposes of determining Article III standing.  This could prove to be significant in light of the Supreme Court’s ruling in CIGNA Corp. v. Amara, 563 U.S. 421 (2011), which held that plaintiffs seeking plan reformation to remedy a misleading plan communication need not prove detrimental reliance on the communication.  Ortiz suggests that, in spite of Amara, defendants may be able to effectively reinstate a detrimental reliance requirement by arguing that, in the absence of detrimental reliance, there is no showing of causation and harm sufficient to satisfy constitutional standing requirements.

[Podcast]: Special Financial Assistance for Multiemployer Pension Plans (Part 1)

proskauer benefits brief podcastThis episode of The Proskauer Benefits Brief is the first of our three-part series analyzing the Pension Benefit Guaranty Corporation (PBGC) guidance on the new special financial assistance program for troubled multiemployer pension plans that was created by the American Rescue Plan Act (ARPA).  In this initial episode, partner Rob Projansky and senior counsel Justin Alex cover the basic contours of the program.

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An Additional Word from IRS Regarding the ARP COBRA Subsidy

The IRS just released some new supplemental guidance on the COBRA premium subsidy in the American Rescue Plan Act (“ARP”). IRS Notice 2021-46, released July 26, 2021 provides additional color on a handful of discrete subsidy issues that had been addressed in earlier guidance but still caused some confusion. The guidance, in Q&A format, addresses:

  • the availability of the subsidy during extended coverage periods due to disability determinations, second qualifying events, and state law extensions,
  • ineligibility for the subsidy due to other group health coverage or Medicare,
  • when a state continuation coverage program qualifies as “comparable” to federal COBRA coverage, and
  • who is the “premium payee’ for purpose of claiming the tax credit, including in the context of controlled groups, MEWAs, and business reorganizations.

The Notice can be found here. For more information on how to claim the ARP COBRA tax credit, see our blog here.

A Practical Guide to Claiming the COBRA Premium Assistance Tax Credit

Over the last few months, employers and plan administrators have concentrated on identifying qualifying individuals eligible for COBRA premium assistance under the American Rescue Plan Act of 2021 (“ARP”), sending out proper notices, and collecting election forms. Now that the dust has settled on the first round of election notices, employers and plans have turned their attention to another pressing topic: claiming the COBRA premium assistance tax credit.

Why is it Important to Apply for the Tax Credit?

ARP provides a 100% COBRA premium subsidy for qualifying individuals from April 1, 2021, through September 30, 2021.  This subsidy is implemented by a tax credit mechanism.  This means that the person to whom the COBRA premiums would otherwise be payable in the absence of the COBRA subsidy—generally, the employer or the plan and, sometimes, the insurer—must claim the tax credit to be reimbursed for the cost of providing “free” COBRA coverage to qualifying individuals.  For details on determining who the “premium payee” is for purposes of the COBRA premium subsidy, please see our blog post overview.

What Taxes are Offset by the Credit?

The tax credit is intended to offset Medicare tax liability.  If the amount of COBRA premium assistance provided to qualifying individuals exceeds the Medicare tax payable (for example, in the case of a multiemployer plan that does not have any Medicare tax liability), a refund of the excess amount can be requested.

How Is the Tax Credit Claimed?

The tax credit is generally claimed by reporting the COBRA premium assistance provided to qualifying individuals on the quarterly employment tax return (IRS Form 941).  (Premium payees that do not normally file the IRS Form 941 because they do not have federal employment tax liability, such as some multiemployer plans, will have to do so to claim the tax credit.)  There is a worksheet provided with the instructions to the IRS Form 941 that outlines how to calculate the two parts of the tax credit: (1) First, the non-refundable portion of the tax credit (the amount by which the COBRA premium assistance is offset by the Medicare tax liability); and (2) Second, the refundable portion of the tax credit (the excess, if any, of the COBRA premium assistance provided over the Medicare tax liability).

For more information about calculating the amount of the COBRA premium assistance that can be claimed as a tax credit, please see our blog post.

How Can the Tax Credit be Paid in Advance?

It is possible to claim the tax credit even before the IRS Form 941 filing deadline.  There are two additional steps needed to get the credit faster. (1) First, an employer (or plan with federal employment tax liability, such as a multiemployer plan with employees or a multiemployer plan that makes benefit payments subject to withholding) may reduce the federal employment taxes it would otherwise be required to deposit up to the amount of the anticipated COBRA premium assistance tax credit. (2) Second, an advance of the anticipated tax credit after reducing available federal employment tax deposits may be claimed by filing an IRS Form 7200 with the IRS.

  • Practice Pointer: If a plan does not have any federal employment tax liabilities to reduce in step one (for example, in the case of a multiemployer plan that does not have employees and does not make any benefit payments subject to withholding), the plan can go straight to step two and file an IRS Form 7200 to request the anticipated tax credit.
  • Practice Pointer: IRS Form 7200 must be faxed to the IRS.

Even if the two steps above are used to claim the tax credit in advance, an IRS Form 941 is still required to complete the full claim for the tax credit. Any advance of the tax credit will need to be reconciled when IRS Form 941 is filed.

When Can the Tax Credit be Claimed?

Claiming the tax credit operates on a rolling deadline basis. There are two key dates, each described below.

  • Date of COBRA Election: The person to whom premiums are payable (e., the employer or the plan) becomes eligible to claim a tax credit for the COBRA premiums not paid by the qualifying individual so far on the date that it first receives the qualifying individual’s COBRA election. For example, if an employer receives a qualifying individual’s COBRA election on June 17, and the individual has not paid premiums starting April 1, the employer would become eligible on June 17 to claim the tax credit for the period of coverage from April 1 through June 30.
  • Beginning of Subsequent Periods of Coverage: At the beginning of each subsequent period of coverage, the person to whom premiums are payable becomes eligible to claim a tax credit for that coverage period (provided the individual remains eligible for COBRA premium assistance for that coverage period). Returning to the facts used above, the employer would become eligible on July 1 to claim the tax credit for coverage provided from July 1 through July 31.

When Can the Tax Credit be taken as an Advance?

If an advance of the tax credit is desired, different timing rules apply.

As a reminder, to claim the tax credit before filing an IRS Form 941, there are two steps: (1) Reduce federal employment tax deposits, and (2) Following the reduction of employment tax deposits to the extent available, file an IRS Form 7200 with the IRS to request an advance of the anticipated excess tax credit.  The timing rules for eligibility to reduce federal employment tax deposits use the same schedule described above. However, if the employer or plan wants to file an IRS Form 7200 to request the anticipated excess tax credit following reduction of deposits, it must wait until the end of the payroll period in which it becomes eligible to claim the tax credit.

Returning to the second part of our example above, for coverage provided from July 1 through July 31, the employer would become eligible to reduce employment tax deposits on July 1—the first day of that coverage period. To file IRS Form 7200 to request an advance of the tax credit for coverage provided from July 1 through July 31, the employer would need to wait until July 16—after the end of the payroll period in which the employer first become eligible to claim the July credit (assuming the employer’s payroll period ran from July 1 through July 15).

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This blog post provides a general overview on how to claim the COBRA premium assistance tax credit.  Employers and plans should develop a course of action to ensure timely recovery of any tax credits to which they are entitled.  But don’t delay – for most employers and plans, the next Form 941 filing deadline is July 31, 2021, so the time to act is now.

PBGC Releases Guidance on New Special Financial Assistance Program for Troubled Multiemployer Plans

As a follow up to our previous alert on the American Rescue Plan Act of 2021, we have summarized the key aspects of the recently released PBGC and IRS guidance on the new Special Financial Assistance Program for troubled multiemployer pension plans in our latest client alert, which can be found here.

District Court Denies Interlocutory Appeal for Novel Issue of “Hardwired” 401(k) Plans

A federal district court in Maryland recently declined to certify an interlocutory appeal to the Fourth Circuit on the issue of whether financial institutions can “hardwire” a preference for their own proprietary investment vehicles into their employees’ 401(k) plans.  David G. Feinberg, et al., & all others similarly situated, Plaintiffs, v. T. Rowe Price Group, Inc., et al., Defendants, No. 17-cv-427, 2021 WL 2784614 (D. Md. July 2, 2021).  In so ruling, the district court prevented, at least for now, an opportunity for an appellate court to consider an issue that could significantly impact the adjudication of fiduciary breach challenges to the offering of proprietary funds in 401(k) plans.

A group of T. Rowe Price employees who participated in the company’s 401(k) plan sued the company in 2017, alleging that T. Rowe Price breached its fiduciary duties of prudence and loyalty in its administration of the plan.  The employees took issue with, among other things, T. Rowe Price’s decision to amend the plan to include “hardwiring” language requiring plan fiduciaries to exclusively offer T. Rowe Price’s proprietary funds as investment options.

Earlier this year, plaintiffs asked the court to find the hardwiring amendment void as against public policy because it “purports to relieve [the fiduciaries] from responsibility or liability” as prohibited by Section 1110(a) of ERISA.  See Feinberg v. T. Rowe Price Group, Inc., No. 17-cv-427, 2021 WL 1102455 (D. Md. Mar. 23, 2021).  Judge Bredar of the District of Maryland rejected this argument, finding the provision in question unlike language that has been held to violate Section 1110(a), such as language expressly limiting fiduciary liability or requiring fiduciaries to take actions that clearly violate ERISA.  Plaintiffs subsequently asked the court to certify for appeal to the Fourth Circuit the narrow question of whether the hardwiring amendment violates Section 1110(a) of ERISA.

In his recent order, Judge Bredar held that the plaintiffs failed to make the showing necessary to justify the “extraordinary step” of an appeal at this stage.  In particular, Judge Bredar stated that the amendment’s permissibility did not pose a “controlling question of law” because it required resolving factual disputes—such as the plan drafters’ intent as to the amendment’s meaning—at the district court level.

Proskauer’s Perspective

While this decision focused on the standard for an interlocutory appeal, the underlying litigation raises novel questions about the validity of hardwiring provisions and the extent to which they might protect plan sponsors against fiduciary breach allegations related to the inclusion of proprietary investment vehicles.  The Supreme Court previously ruled that ordinary rules of prudence govern the decision to maintain employer stock in employee stock ownership plans (“ESOPs”), even though by definition the assets of these plans must be invested in company stock.  Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 409 (U.S. 2014).  It remains to be seen whether the Supreme Court’s reasoning in the ESOP context applies equally to employers who, like T. Rowe Price, limit their 401(k) plan investment menus to proprietary funds.


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