Employee Benefits & Executive Compensation Blog

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

IRS Proposed Regulations Would Permanently Allow Remote Witnessing of Spousal Consent

The IRS issued new proposed regulations that would permanently change the rules that require spousal consent for plan distributions to be signed in the physical presence of a notary or plan representative.  Specifically, the proposed regulations would allow plans to accept remote notarization or witnessing by a plan representative if the remote process meets certain standards aimed at ensuring the integrity of the process.

In the face of the COVID-19 pandemic, the IRS previously provided similar, but temporary, relief (addressed on our earlier blog posts here and here), but the temporary relief is set to expire at the end of 2022. The proposed regulations are subject to a public comment period, but to avoid any gap in the relief between the expiration of the temporary relief and the finalization of these proposed regulations, the IRS stated that the proposed regulations can be relied upon prior to the applicability date of any final regulations.

Proposed Requirements for Remote Witnessing of Spousal Consent

Under the proposed regulations, remote witnessing by a notary public or by a plan representative is permitted, provided the process meets the requirement outlined below.  These requirements are very similar to the requirements in the IRS’s temporary COVID-19 relief.

Whether remote notarization is witnessed by a notary or a plan representative, the consenting spouse’s signature must be witnessed using live audio-video technology, and the electronic process must comply with the general rules regarding electronic elections:

  • The electronic system allows for effective access
  • The electronic system is reasonably designed to preclude anyone other than the applicable individual (e., spouse) from making the election
  • The applicable individual is provided a reasonable opportunity to review, confirm, modify or rescind the election before it becomes effective (even where a spouse would not otherwise be able to rescind their election if the signature were witnessed in the physical presence of a notary or plan representative)
  • The applicable individual receives written or compliant electronic confirmation of the effect of the election within a reasonable time

In addition, if spousal consent is remotely witnessed by a notary, the process must comply with the State law requirements applicably to the notary.

If spousal consent is remotely witnessed by a plan representative, the process also must comply with the following five requirements:

  1. The spouse presents a valid photo ID during the live audio-video conference
  2. The live audio-video conference allows for direct interaction between the spouse and the plan representative
  3. The spouse electronically transmits a legible copy of the signed document directly to the plan representative on the date of signature
  4. The plan representative acknowledges witnessing the signature and transmits the signed spousal consent and acknowledgment back to the spouse using an electronic system that allows for effective access, providing notice that a paper copy is available without charge
  5. The plan representative records the live audio-video conference and retains the recording consistent with the rules regarding plan document retention (This concept is new and was not included in the temporary relief)

While the proposed regulations do not require a plan to permit remote witnessing, they would require a plan that allows remote witnessing to also accept spousal consents witnessed in the physical presence of a notary (i.e., a plan cannot require only remote notarization).

Proskauer Perspective

The proposed regulations recognize that remote witnessing options are valuable tools for plans and participants, while balancing concerns about authenticating spousal signatures. These options give flexibility to plan participants and their spouses, and may save them time and money.  Moreover, remote witnessing can address situations where mobility limitations, health concerns, or geographic distance make in-person witnessing a challenge.

Plan administrators should keep in mind that state remote notarization laws are evolving rapidly, and plans looking to permit this option will need to be able to reasonably determine whether applicable state law has been followed.  Plan administrators should discuss with counsel how to approach remote witnessing.

The Greatest Gift of All…Tri-Agencies Issue Welcome Relief on Prescription Drug Reporting

Just three short days before the December 27th deadline for health plans and issuers to report prescription drug and health care spending information to the government, on December 23, 2022, the Departments of Labor, Treasury, and Health and Human Services (the “Departments”) issued undoubtedly welcome reporting relief for health plans and issuers facing difficulty meeting the looming deadline.

By way of short background, the Consolidated Appropriations Act, 2021, requires that health plans and issuers report, on an annual basis, certain prescription drug and health care spending information. The first reporting (for 2020 and 2021) was originally due in December 2021, but was delayed to December 27, 2022.  The reporting, which is required to be done in precise coordination with the plan’s various service providers and uploaded via a specific format to a Centers for Medicare and Medicaid Services website, has proved challenging for many plan sponsors and issuers.

Accordingly, recognizing the significant operational issues facing plan sponsors and issuers in their efforts to comply with the new reporting requirements, the Departments announced two important pieces of relief on December 23rd: (1) The Departments will not take enforcement action against a plan or issuer that uses a good faith, reasonable interpretation of the regulations and the reporting instructions in making its submission for the 2020 and 2021 plan years, and (2) The Departments will permit a grace period until January 31, 2023, for the 2020 and 2021 submissions due on December 27th.

In the guidance, the Departments also addressed a few substantive aspects of the filing requirements, including the data aggregation rules and optional reporting on vaccines, and clarified the permissibility of multiple submissions (by one reporting entity on behalf of more than one plan or issuer) and multiple reporting entities (for the same plan or issuer). The Departments will allow certain limited information to be reported via email. The guidance (in the form of FAQs) can be found here.

SECURE 2.0 Act of 2022 Arrives: (Another) Landmark Retirement Package

The wait is over for SECURE 2.0, a long-awaited (and debated) package of retirement plan reforms.  Today, Congress passed the “SECURE 2.0 Act of 2022” as part of the 2023 Consolidated Appropriations Act; President Biden is expected to sign the bill into law soon. The bill text may be viewed here, and the Senate Finance Committee’s summary of SECURE 2.0 may be viewed here.

Given the breadth of the changes and the anticipated regulatory efforts to implement the new law, virtually all qualified retirement plans will need to be reviewed in conjunction with SECURE 2.0’s passage.  Future blog posts will explore these provisions in more detail, so check back for comprehensive analysis.  Until then, below is a high-level summary of some key highlights for employers and retirement plan sponsors:

Improving Access to Retirement Savings. SECURE 2.0 includes several changes intended to improve employee access to workplace-based retirement savings.  Among other changes, it:

  • Requires automatic enrollment for new 401(k) and 403(b) plans that are first established after SECURE 2.0’s enactment, with limited exceptions for small businesses and new employers (effective for plans established after enactment, with automatic enrollment provisions required for plan years beginning after December 31, 2024)
  • Permits employers to treat qualifying employee student loan repayments as elective deferrals for purposes of matching contributions to 401(k), 403(b), 457(b) or SIMPLE plans (effective for plan years beginning after December 31, 2023)
  • Debuts a new retirement plan-linked “emergency savings” account, whereby eligible non-highly compensated employees may be automatically enrolled by an employer into an emergency savings account maintained as part of the retirement plan; employee contributions to the account would be capped at $2,500, with the employee deferral rate capped at 3% or less (effective for plan years beginning after December 31, 2023)
  • Exempts “emergency withdrawals” from the otherwise applicable penalties on early withdrawals from retirement plan accounts; distributions for emergencies would be limited to $1,000 per calendar year, with the opportunity for repayment within a three-year period (effective for distributions made after December 31, 2023)
  • Replaces the saver’s tax credit with the “saver’s match,” which is a federal matching contribution deposited in the retirement plan account for qualifying employees (based on modified adjusted gross income); the match is 50% of qualifying contributions up to $2,000 (effective for tax years beginning after December 31, 2026)
  • Increases catch-up contribution limit for employees who have attained ages 60, 61, 62, and 63 to the greater of: (1) $10,000 (indexed), or (2) 150% of the regular catch-up contribution limit (effective for tax years beginning after December 31, 2024); however, for tax years beginning after December 31, 2023, note that all catch-up contributions are subject to Roth treatment (except for individuals with wages of $145,000 or less)
  • Provides that employers without retirement plans may offer “starter” deferral-only 401(k) plans; starter plans would be exempt from nondiscrimination and top-heavy testing and employee deferrals would be capped at $6,000 (indexed) (effective for plan years beginning after December 31, 2023)
  • Permits employers to provide employees with the option of receiving matching or non-elective contributions on a Roth basis (effective on enactment)

Building on SECURE Act of 2019. SECURE 2.0 revises certain provisions first introduced in the SECURE Act of 2019, including:

  • Reduces the eligibility period for long-term part-time workers to become eligible to make elective deferrals to a workplace retirement plan from three consecutive 12-month periods to two consecutive 12-month periods; SECURE 2.0 also extends long-term part-timer rules to 403(b) plans covered by ERISA (effective for plan years beginning after December 31, 2024)
  • Delays the age on which the required beginning date is determined for starting required minimum distributions from age 72 to age 73 for individuals who attain age 72 after December 31, 2022, and then increases the age further to age 75 for individuals who attain age 74 after December 31, 2032 (effective for distributions required to be made after December 31, 2022)

Simplifying Retirement Plan Operations. Appearing to recognize the operational burdens often placed on retirement plan sponsors, SECURE 2.0 includes a number of provisions intended to streamline retirement plan operations, as it:

  • Expands the IRS’s Employee Plans Compliance Resolution Systems (“EPCRS”) to cover additional types of errors, with the result being that most inadvertent failures to comply with tax-qualification rules would be eligible for self-correction, assuming IRS-approved practices and procedures were in place to prevent such errors (effective on enactment)
  • Permits retirement plan fiduciaries the flexibility not to recoup overpayments mistakenly made to retirees, with good faith relief available for recovery of benefit overpayments predating enactment (effective on enactment)
  • Reduces penalty excise taxes for individual failures to take required minimum distributions from 50% to 25%; further reduction of excise tax to 10% possible if error is corrected in a timely manner (effective for tax years beginning after enactment)
  • Creates a national online database, housed at the Department of Labor, for former participants to search for contact information for retirement plan administrators (DOL database required to be created within two years of enactment, but required plan reporting would start the second December 31 after enactment)
  • Permits employees to self-certify that they have experienced a hardship for purposes of taking a hardship withdrawal from retirement plan accounts (effective for plan years beginning after enactment)
  • Makes permanent the safe harbor relief for correction of automatic enrollment and automatic escalation failures, which was previously set to expire (effective for errors after December 31, 2023)

S.D.N.Y. Voids ERISA Plan’s Arbitration Provision

A district court in New York recently refused to enforce an arbitration provision in an ERISA fiduciary breach lawsuit challenging the valuation of an Employee Stock Ownership Plan (“ESOP”).  The ruling in Lloyd v. Argent, No. 22-cv-4129, 2022 U.S. Dist. LEXIS 219964 (S.D.N.Y. Dec. 6, 2022), exposes the continued uncertainty as to the enforceability of arbitration provisions when applied to ERISA fiduciary breach claims.

Plaintiffs in the case were former employees and participants in the defendants’ ESOP.  They alleged that, in 2016, defendants caused the ESOP to purchase shares of the employer’s stock at an inflated price.  In the years following the acquisition, the stock price plummeted for reasons plaintiffs state were foreseeable at the time of the acquisition.  Defendants moved to dismiss on various grounds, and also to compel arbitration, based on arbitration provisions contained in the plan document.  Among other things, the arbitration provisions disallowed “any remedy which has the purpose or effect of providing additional benefits or monetary relief” to anyone but the claimant.  The arbitration provisions also included a non-severability clause, so the unenforceability of any requirement would render the provisions void in their entirety.

The court denied the motion to compel arbitration, holding that it impermissibly limited substantive rights conferred by ERISA, and was entirely unenforceable due to the non-severability clause.  The court explained that under recent Supreme Court precedents, contractually agreed to arbitration provisions are not enforceable where they abrogate statutory rights, as arbitration is meant to change only the procedure by which rights are disputed.  The court concluded that representative actions under ERISA are a “statutory right” that arbitration provisions cannot override.  Further, the court concluded that the provisions here impermissibly precluded the plaintiff from seeking removal of a fiduciary, which is a form of equitable relief expressly provided for by ERISA.

Proskauer’s Perspective

This decision comes at a time of heightened interest in the ERISA community as to whether arbitration provisions can serve as a means to prevent suits to recover class-wide relief in ERISA cases.  The Supreme Court is currently considering a certiorari petition that could resolve the question, but in the meantime litigants must navigate through diverse and irreconcilable rulings in different jurisdictions.  While the court here cited support from the Second and Seventh Circuits, the decision is potentially at odds with a 2019 Ninth Circuit decision (discussed here) and a recent decision from a district court in the Eleventh Circuit (discussed here).  Furthermore, unlike prior rulings that refused to enforce arbitration provisions in employment agreements based on the rationale that an individual participant could not preclude the recovery of relief on behalf of the plan, here the arbitration provisions in question were in the plan document itself.  Accordingly, if this ruling were to be universally accepted, it would call into question the ability of plan sponsors to forestall class action relief through the use of arbitration provisions.

Proxy Season Greetings: ISS and Glass Lewis Announce Policy Updates Ahead of the 2023 Proxy Season

Proxy advisory firms Institutional Shareholder Services (“ISS”) and Glass Lewis (“GL”) each published their annual policy updates for 2023, which updates made certain changes relating to executive compensation.[1]  As a general matter, the changes are incremental to the existing policies and do not significantly change the rubric by which ISS and GL review compensation programs.


Severance Payments.  ISS will continue to consider problematic severance pay on a case-by-case basis when determining its recommendation on say-on-pay and board member votes.  However, it has updated its policy on severance payments to require that companies accurately disclose the circumstances of an executive’s termination (voluntary vs. involuntary) when severance is paid.  Specifically, ISS’s list of factors that carry significant weight and may result in a “no-vote” recommendation on the say-on-pay and board member votes now includes severance payments made when the termination is not clearly disclosed as involuntary (i.e., a termination without “cause” or resignation for “good reason”).  In short, ISS objects to Form 8-K and proxy disclosures that seek to put a positive spin on an executive’s involuntary departure (e.g., describing an involuntary termination as a retirement).  Companies should be mindful of this issue when describing any termination on Form 8-K or the proxy statement for their annual meeting.

Value-Adjusted Burn Rates for Equity Plan Evaluations.  ISS’s 2022 Benchmark Policy Update included a change to how the burn rate should be calculated for purposes of its Equity Plan Scorecard evaluations after a one-year transition period.  With that period ending January 31, 2023, ISS has now updated its Benchmark Policy to remove its prior burn rate methodology and to only include the new methodology called Value-Adjusted Burn Rate (“VABR”).  The VABR methodology is intended to capture an option grant’s value more accurately by utilizing the Black-Scholes value for stock options (instead of the previous approach that used a volatility multiplier).


Long-Term Incentives.  GL has modified its position on performance-based awards within a company’s long-term incentive offerings.  Historically, GL has set a 33% floor on performance-based awards with a minimum of a three-year performance or vesting schedule, but now, GL may recommend a “no vote” on the say-on-pay proposal when a company’s long-term incentives fall below 50% performance-based.

Mega-Grants. GL clarified its approach when “mega-grants” have been granted and the awards, among other things, have excessive quantum, lack sufficient performance conditions, and/or are excessively dilutive.  GL will generally recommend against the compensation committee chair when such outsized awards have been granted.

Front-Loaded Awards.  Front-loaded awards are equity awards intended to provide for multiple years of equity compensation upfront.  GL recognizes the value that front-loaded awards may provide to compensation committees by locking-in executive service and incentives.  However, GL expanded on its concerns regarding the use of front-loaded awards due to the increased restrictions placed on boards to respond to unforeseen factors.

One-Time Awards.  GL had previously required that companies describe and explain the use of one-time awards.  GL expanded on this requirement by adding that the disclosure should discuss how the compensation committee determined the quantum of the award and its structure.

Compensation Committee Discretion.  GL affirmed its position that it respects a compensation committee’s need to be able to exercise discretion over incentive payments to account for “significant events that would otherwise be excluded from performance results of selected metrics of incentive programs.”  However, GL clarified that companies should provide a thorough discussion of how such events were considered in the committee’s decisions to exercise discretion, and if a company is not prepared to provide this discussion, GL indicated that the company should not apply discretion over incentive pay outcomes.

Disclosure Related to Say-on-Pay.  GL expanded upon what it considers robust disclosure in the event of low levels of support on a company’s say-on-pay vote.  Any decision for not making any changes that drove low support should be explained, as well as what the company’s intentions are going forward.

New SEC Pay vs. Performance and Clawback Rules.  GL will not take into account a company’s newly required pay vs. performance disclosure for purposes of GL’s Pay-for-Performance methodology, but the new disclosure may be considered as part of GL’s qualitative analysis.  To learn more about the SEC’s new Pay-vs-Performance disclosure requirements, read our blog post here.  Similarly, companies that make an early effort to meet the standards of the SEC’s new clawback requirements may mitigate GL’s concerns if the company only previously adopted a clawback policy consistent with the Sarbanes-Oxley Act.  For more background on the SEC’s new clawback rules, please see our earlier discussion in this blog post and this Law360 article.


ISS will apply these new policies to annual meetings beginning February 1, 2023, and GL will apply its new policies beginning January 1, 2023.  Compensation committees should work with their counsel and compensation consultants to determine whether these changes impact their company, and, if they do, what, if anything, should be done to address the impact.

Proskauer’s Employee Benefits and Executive Compensation team regularly advises companies on best practices with respect to implementing executive compensation programs, including the potential impact of proxy advisor policies on the company.  Please contact a member of the team with questions.


[1] ISS released its  Benchmark Policy Update for 2023 on November 30, 2022, and GL released its Policy Guidelines on November 17, 2022.

DOL Proposes Self-Correction Option and Other Changes to Voluntary Fiduciary Correction Program

The U.S. Department of Labor (the “DOL”) proposed changes to its Voluntary Fiduciary Correction Program (the “VFCP”) in November for the first time since 2006.  The most significant change is the addition of a self-correction option for delinquent deposits of participant contributions and loan repayments.  The other changes clarify and expand certain existing aspects of the VFCP.  The DOL also proposed conforming changes to the prohibited transaction class exemption, PTE 2002-51, associated with the VFCP.

Although the proposal of a self-correction option has created a “buzz,” the proposed option would only be available if certain conditions are satisfied, including the following:

  • The employer remits the delinquent participant contributions or loan repayments within 180 calendar days of withholding or receipt;
  • The employer computes the “lost earnings” using the VFCP’s online calculator from the date of withholding or receipt and the lost earnings do not exceed $1,000; and
  • The employer files a self-correction notice with the DOL and retains certain records similar to the records that would need to be submitted with a filing under the VFCP today.

The notice requirement stands in contrast to self-corrections under the Internal Revenue Service’s Voluntary Correction Program, which does not require the submission of a notice to the Service following a self-correction.  The DOL is accepting comments on the proposed changes through January 20, 2023, and it remains to be seen whether the DOL loosens the proposed requirements for self-correction in response to comments.

DOL’s Final ESG Rules Reflect Warmer Attitude Toward ESG, But Maintain Bedrock Principle that Risk and Return Cannot Be Sacrificed

On November 22, 2022, the U.S. Department of Labor’s Employee Benefits Security Administration (the “DOL”) released final regulations (the “Final Rules”) that are intended to be more supportive of ERISA fiduciaries considering environmental, social, and governance factors (“ESG”) in investment decisions as compared to the Trump administration’s 2020 regulations (the “2020 Regulations”).  The Final Rules are largely consistent with the DOL’s proposed ESG regulations issued in October 2021 (the “Proposed Rules”), with a few important differences noted below.  Although the Final Rules are warmer to ESG considerations than the 2020 Regulations, the Final Rules retain ERISA’s bedrock principle that an ERISA fiduciary cannot sacrifice investment returns or assume greater investment risk to promote collateral objectives.  The Final Rules also retain the core principle that a fiduciary’s responsibility with respect to investment management includes the management of appurtenant shareholder rights, such as voting proxies.

The Final Rules will generally become effective on January 30, 2023, except that certain of the proxy voting-related rules described below will not take effect until December 1, 2023.

Key Takeaways

  • The Final Rules provide some comfort that ESG considerations are not off limits, but the underlying principle that risk and return cannot be sacrificed has not changed.
  • The Final Rules do not include a “safe harbor” for a fiduciary to treat ESG-themed funds as a separate asset class. Accordingly, ESG-themed funds must be evaluated relative to other alternatives in the particular asset class, and fiduciaries could be exposed to potential claims if an ESG-themed investment option underperforms its benchmark.  To mitigate risk, fiduciaries should carefully document the reasons for their investment decisions—including the relevance of ESG considerations to risk and return objectives.
  • The Final Rules say that fiduciaries of participant-directed plans (such as a typical 401(k) or 403(b) plan) may consider participant preferences when constructing a plan’s investment lineup, but there is no softening of the rule that fiduciaries may not sacrifice return or expose participants to additional risk to accommodate those preferences. Consequently, ESG factors will generally be relevant only insofar as they relate to the fiduciary’s evaluation of risk and return.
  • While U.S. state “governmental plans” are not subject to ERISA, certain governmental plans are subject to rules that are similar to ERISA and that are generally interpreted consistently with ERISA. It remains to be seen how state laws that restrict consideration of ESG factors will be interpreted or applied.
  • Investment managers of separate accounts, private investment funds and other pooled investment vehicles that have contractually agreed to operate as if the fund, account or other vehicle were subject to ERISA or in accordance with the ERISA standard of care should consider whether these changes to the ERISA investment duties regulation should affect the operations or investments of the account, fund or vehicle.
  • The Final Rules retain the core principle that a fiduciary’s responsibility with respect to investment management includes the management of appurtenant shareholder rights, such as voting proxies. Driven by a concern that the 2020 Regulations could discourage proxy voting activity by plan fiduciaries, the Final Rules eliminate burdensome recordkeeping requirements and underscore that proxy voting is a key tool in managing investments in issuers that should be taken seriously by ERISA fiduciaries.  The Final Rules also retain the core requirements relating to the prudent selection and monitoring of service providers to advise and assist with the exercise of shareholder rights.
  • The Final Rules allow plan fiduciaries to establish investment policies that cover proxy voting, and they require managers of pooled “plan asset” funds to reconcile conflicting policies of participating plans to the extent possible. This could require that the fund manager exercise shareholder rights of the fund (i.e., voting or abstaining) in proportion to each plan’s economic interest in the fund. Alternatively, the fund manager may develop its own investment policy statement that is consistent with Title I of ERISA and require participating plans to accept that investment policy statement, including any proxy voting policy, before they are allowed to invest (or in order to remain invested in the fund).


The 2020 Regulations consisted of two separate, but related, rulemakings– one specific to selecting ERISA plan investments[1], the other related to proxy voting and the exercise of other shareholder rights.[2] Although the 2020 Regulations did not specifically refer to “ESG” considerations, they distinguished between “pecuniary” and “non-pecuniary” factors, creating a perception that any consideration of ESG factors (even factors considered to be financially material) could expose ERISA fiduciaries to liability.

As part of a directive by President Biden to review regulations that were inconsistent with the promotion and protection of public health and the environment, the DOL announced on March 10, 2021 that it would not enforce the 2020 Regulations. In October 2021, the DOL issued the Proposed Rules (discussed here), and the Final Rules are the culmination of that review.

Final Rules

The Final Rules make a number of ESG-related changes to ERISA’s “investment duties” regulation set forth at 29 C.F.R. 2550.404a-1, including the following:

Investment-Related Changes

  • Acknowledges that Consideration of ESG Factors May be Permitted as Part of Satisfying Duty of Prudence. Like the 2020 Regulations, the Final Rules preserve the long-standing requirement that a fiduciary give “appropriate consideration” to the facts and circumstances that the fiduciary knows or should know are relevant. “Appropriate consideration” includes consideration of the projected return of the portfolio relative to the funding objectives of the plan; and the Final Rules state that risk and return factors “may include” the economic effects of climate change and other ESG factors on the particular investment.  The Final Rules also state that the weight given to any factor should reflect an assessment of its risk/return impact.  Unlike the Proposed Rules, the Final Rules do not say that prudent analysis “may often require” consideration of ESG factors, and they do not include a list of examples of ESG factors that may be appropriate for an ERISA fiduciary to consider; but the Preamble to the Final Rules discusses examples.
  • Eliminates the Bifurcation Between “Pecuniary” and “Non-pecuniary” Factors. As noted above, the Final Rules eliminate the distinction between “pecuniary” and “non-pecuniary” factors. Instead, they provide that a fiduciary “may” consider any factor material to the risk/return analysis, including climate change and other ESG factors.
  • Simplifies the “Tie-Breaker” Concept. The Final Rules make it easier to use ESG or other “collateral benefits” as a “tie-breaker” between competing investments.
    • First, the Final Rules change the definition of a “tie.” Instead of limiting a tie to a case where the applicable investments could not be distinguished based on “pecuniary factors” alone, the Final Rules define a tie as competing investments that “equally serve the financial interests of the plan over the appropriate time horizon”.
    • Second, the Final Rules eliminate the special documentation and disclosure requirements for a tiebreaker. Instead, the Final Rules contemplate application of the same documentation and disclosure principles as for other investment decisions.

Changes Affecting Participant-Directed Plans

  • Removes the Prohibition on Funds and Products Supporting “Non-Pecuniary” Goals as Qualified Default Investment Alternatives (“QDIAs”). The 2020 Regulations prohibited a fund, product, or model portfolio that expressly considered ESG factors to be used as a QDIA.  The Final Rules do not include such a prohibition, or any other special ESG-related rules with respect to QDIAs: QDIAs are treated like other investment options.
  • Clarifies that Fiduciaries May Take Into Account Participant Preferences When Constructing 401(k) or 403(b) Plan Investment Lineups. The Final Rules include a new clarification that a fiduciary of a participant-directed plan (such as a typical 401(k) or 403(b) plan) does not violate the duty of loyalty solely because the fiduciary takes into account participants’ preferences when setting the plan’s investment lineup. The DOL noted in the Preamble that if aligning an investment option with participants’ preferences would lead to greater participation and higher deferral rates, then it could lead to greater retirement security and thus further the purposes of the plan.  Nonetheless, the clarification does not change the duty of prudence. The duty of prudence still turns on analysis of risk and return characteristics (without regard to what participants might want). The Preamble specifically notes that the Final Rules do not mandate that fiduciaries factor participants’ preferences into their decision making and they do not prescribe a methodology to account for such preferences.

Proxy Voting-Related Changes

  • Removes Statement that Voting of Every Proxy is Not Required. The 2020 Regulations stated that a fiduciary’s duties to manage shareholder rights “does not require the voting of every proxy or the exercise of every shareholder right”. The DOL deleted this language out of a concern that it could imply that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal.  The Preamble to the Final Rules does, however, acknowledge that a fiduciary may determine on a case-by-case basis that voting of a proxy is not in the plan’s best interests (for example, because the cost exceeds the potential benefit).
  • Removes Proxy Voting Policy “Safe Harbors.” The 2020 Regulations permitted a fiduciary to discharge its duties with respect to proxy voting by establishing (i) a policy to limit voting resources to particular types of proposals that the fiduciary had prudently determined were substantially related to the relevant issuer’s business or expected to have a material effect on the value of the investment, and/or (ii) a policy of refraining from voting on proposals or particular types of proposals when the plan’s holdings in the relevant issuer were sufficiently small. The DOL did not include these “safe harbors” in the Final Rules out of a fear that they could encourage abstention as the normal course, rather than emphasize the importance that prudent management of shareholder rights can have in enhancing the value of the plan’s investment.
    • Consistent with the 2020 Regulations, the Final Rules continue to allow a fiduciary to adopt and follow prudently designed proxy voting policies, provided that the policies do not (i) prohibit voting on matters that the fiduciary prudently determines are expected to have a “significant” (the 2020 Regulations used “material”) effect on the value of the investment or investment performance after taking into account the costs involved, or (ii) require the fiduciary to vote when the fiduciary prudently determines that the matter being voted upon is not expected to have such an effect after taking into account the costs involved.
    • As under the 2020 Regulations, the Final Rules require that an investment manager of a pooled “plan asset” fund must reconcile, insofar as possible, conflicting investment policies of participating plans. In general, this could mean that the investment manager must take action (vote or abstain) in proportion to each plan’s economic interest in the fund. Alternatively, the investment manager may develop its own investment policy statement that is consistent with Title I of ERISA and require participating plans to accept that investment policy statement, including any proxy voting policy, before they are allowed to invest. In such cases, ERISA plan fiduciaries would need to assess the prudence of the investment manager’s investment policy statement and proxy voting policy before deciding to invest with the manager.  Although the Final Rules generally become effective on January 30, 2023, these rules related to proxy voting will not take effect until December 1, 2023.
  • Removes Special Monitoring Obligations for Delegated Proxy Voting Rights and Advisory Services. The 2020 Regulations provided specific monitoring obligations on plan fiduciaries who delegated proxy voting rights or utilized advisory services of proxy voting firms. The Final Rules remove the special monitoring obligations but still require “prudence and diligence” in the selection and monitoring of delegates and advisers.
  • Eliminates Special Recordkeeping Requirement Regarding Proxy Voting Activities. The 2020 Regulations required fiduciaries to maintain records on proxy voting activities and other exercises of shareholder rights. The Final Rules remove this special recordkeeping requirement; but fiduciaries should still document their oversight of investment managers.

Changes Specific to “Plan Asset” Funds and Investment Managers

  • As noted above, the Final Rules require that a pooled “plan asset” fund manager must reconcile conflicting investment policies of participating plans to the extent possible, which could mean exercising shareholder rights of the fund (i.e., voting or abstaining) in proportion to each plan’s economic interest in the fund. Alternatively, the fund manager may develop its own ERISA-compliant investment and proxy voting policies and require participating plans to accept that them in order to invest (or remain invested in the fund). This portion of the Final Rules will not take effect until December 1, 2023.
  • Investment managers that have contractually agreed to operate a fund, account or other vehicle as if it was subject to ERISA or in accordance with the ERISA standard of care should consider whether any changes to the operations or investments of the account, fund or vehicle are necessary in light of the Final Rules.

*          *          *          *          *

Although the Final Rules are generally supportive of considering ESG factors under certain circumstances, the bedrock principles of ERISA’s fiduciary duties of prudence and loyalty generally remain unchanged. In particular, ERISA plan fiduciaries still must base their investment decisions and exercise shareholder rights on the risk-adjusted value to plan participants and beneficiaries, without subordinating their economic interests to other goals or objectives.

As always, Proskauer is here to help plan fiduciaries apply the Final Rules.

[1] For more on the plan investments portion of the 2020 Regulations, see here and here.

[2] For more on the proxy rule portion of the 2020 Regulations, see here.

Final SEC Clawback Rules: Key Dates that Issuers Need to Know

On November 28, 2022, the Securities and Exchange Commission (the “SEC”) published the final clawback rules (the “Final Rules”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in the Federal Register.

Now that the Final Rules have been published in the Federal Register, issuers should be aware of the following key deadlines[1]:

  • January 27, 2023: The Final Rules become formally effective (60 days after the Final Rules were published in the Federal Register).
  • February 24, 2023: Outside date for national securities exchanges (“exchanges”) to file proposed listing standards that comply with the Final Rules (this is the last business day before the 90th day post-publication window closes on February 26, 2023).
  • November 28, 2023: Outside date for the exchanges’ listing standards to become effective.
    • On the date that exchanges’ listing standards become effective all incentive-based compensation “received” (as defined in the Final Rules) by executive officers on or after this date must be subject to a compliant clawback policy.
    • Disclosures required by Final Rules must be included in all applicable SEC filings required on or after this date.
  • 60 days after listing standards become effective (latest date: January 27, 2024): Outside date for issuers to adopt compliant clawback policy.

The Final Rules were adopted on October 26, 2022, and we discuss the detailed requirements of the Final Rules and related practical considerations in our earlier blog post. We also discuss the interaction of the Final Rules and the DOJ clawback guidance in this blog post and this Law360 Article.

Proskauer’s Employee Benefits and Executive Compensation team is advising issuers on implementation of new clawback policies and updating existing clawback policies to comply with the listing standards as they are finalized. Please contact a member of the team with questions.

[1]  Please note that some of the date references are to “outside” dates (i.e. the latest possible date) and the timetable could be accelerated depending on exactly when the exchanges and SEC take action, so issuers should continue to monitor developments.

IRS Opens Determination Letter Program to Individually Designed 403(b) Plans

On October 21st, the IRS announced changes to its qualified plan determination letter program. Most notably, the program has been expanded to include section 403(b) tax-sheltered annuity plans (“403(b) plans”). Although 403(b) plans are similar to tax-qualified defined contribution plans (“401(a) plans”), they are subject to unique rules, and, until now, the IRS has not offered a determination letter program for individually designed 403(b) plans.  While not the focus of this blog post, the IRS also harmonized and extended certain “remedial amendment periods” across individually designed 401(a) and 403(b) plans and updated and restructured certain related definitions.

Why Get a Determination Letter?

Like 401(a) plans, 403(b) plans must satisfy detailed requirements in both form and operation.  A failure to comply with either the form requirements or the operational requirements would result in loss of favorable tax treatment—which means that tax-deferred account balances under the 403(b) plan would be subject to immediate income tax, as well as interest and potential penalties.  The determination letter program provides important protection against this untenable result.  Under the program, the IRS reviews the plan document and decides whether the form requirements are satisfied.  (The IRS does not review operations under the program.)  If the determination is favorable, the IRS is generally precluded from subsequently disqualifying the plan based on a form violation or for administering the plan in accordance with the terms of the approved document.

Given the myriad technical requirements for a plan document, the benefit of an IRS determination cannot be understated.  Word of caution, though: the IRS reserves the right to impose sanctions (penalties) if it discovers a violation during the determination process.  Plan sponsors should review the plan documents carefully before requesting the determination; errors that are identified before submission can be corrected under the IRS’s Voluntary Correction Program.

Details of the Determination Letter Program Expansion to 403(b) Plans (Rev. Proc. 2022-40)

As noted above, the IRS has expanded the determination letter program to include 403(b) plans. To protect against the IRS being overwhelmed, the window to request a determination is limited:

  • Plan sponsors can apply only for an initial determination, a determination following a plan merger, or a determination upon the termination of a 403(b) plan.
  • Generally, an initial determination is permitted only for plans that have not received a determination as an individually designed plan, and sponsors may apply on a rolling basis based on their employer identification number (“EIN”). For plans sponsored by employers with EINs that end in 1, 2, or 3, applications may be submitted on or after June 1, 2023; for plans sponsored by employers with EINs that end in 4, 5, or 6, applications may be submitted on or after June 1, 2024; and for plans sponsored by employers with EINs that end in 7, 8, 9, or 0, applications may be submitted on or after June 1, 2025. The Revenue Procedure does specify a deadline for applying.
  • Plan sponsors may also seek a determination letter following a plan merger. As with 401(a) plans, the plan merger would need to occur by the end of the first plan year after the applicable corporate merger, acquisition, or other similar business transaction, and the determination letter application must be filed by the end of the first plan year that starts after the plan merger.

Rev. Proc. 2022-40 also includes caveats regarding limitations on the scope of IRS review and the purposes for which a plan sponsor may rely on the determination letter, which are similar to those that apply to 401(a) plans.  The guidance also says that the IRS will not express an opinion on any issues arising from a plan’s coverage of employees outside the sponsor’s controlled group (i.e., the determination will not cover issues related to being a multiple employer plan). As with other determination letter applications, plan sponsors will need to furnish notices to interested parties during the 10-24 day period before a determination request is filed.

In announcing Rev. Proc. 2022-40, the IRS also said to expect more changes to the general determination letter program procedures in 2023.

Proskauer Perspective

This announcement is a significant and welcome development for 403(b) plan sponsors. Given the myriad technical form requirements for a plan, there is always a risk that an IRS audit might reveal a latent, but disqualifying, error in the plan document.  The determination letter program offers important protection against that risk.

In addition to the protection against audit risk, the market may begin to expect that a 403(b) plan has a favorable determination letter. While determination letters are not technically required, auditors, investment managers, and transaction partners often request favorable determination letters as part of their diligence process.  Not having one could put the sponsor in the difficult position of having to make representations about compliance without the benefit of assurance from the IRS.

ERISA Fee Complaint Dismissed in Pennsylvania District Court, Extending Favorable Trend

In Krutchen v. Ricoh USA, No. 22-cv-678, 2022 U.S. Dist. LEXIS 206792 (E.D. Pa. Nov. 15, 2022), a Pennsylvania district court dismissed an ERISA excessive fee complaint for failing to provide enough information about alleged comparator plans that allegedly paid less for recordkeeping services. The decision is notable for delivering defendants a victory in the Third Circuit, which previously allowed excessive recordkeeping claims to survive dismissal in Sweda v. U. Pennsylvania (we discussed here), and for citing favorably to recent defendant-friendly opinions from the Sixth, Seventh, and Eighth Circuits.


The plaintiffs in Krutchen are former employees of the plan sponsor defendant who participated in its 401(k) plan. The plaintiffs brought claims for breach of the fiduciary duty of prudence and failure to monitor in connection with their allegation that the plan paid excessive recordkeeping fees. In support of their claims, the plaintiffs compared the plan’s expenses to twelve other plans’ recordkeeping expenses, cited a survey of nationwide recordkeeping expenses, and cited case law addressing recordkeeping expenses of other plans.

The District Court’s Decision

The court dismissed plaintiffs’ claims in their entirety but permitted plaintiffs to refile their complaint. In its ruling, the court explained that fiduciaries may select diverse services from bundled offerings or additional a la carte services, as the plan did here. The court recognized that price tag to price tag comparisons without sufficient detail about the services actually being performed are too generalized and speculative to support a plausible inference that defendants breached their fiduciary duties by overpaying for services.

The court faulted plaintiffs for failing to include information regarding the specific services used by the plan, the comparator plans, and the plans reviewed in cited case law. The plaintiffs listed services that all national recordkeepers have the capability to provide and merely alleged that the plan’s selected services “fell within the broad range” of those available. The court found that this did not provide enough information to know whether the fee comparisons were valid or if they were “apples to oranges” comparisons. The court distinguished Sweda, where plaintiffs used “specific comparisons” showing that the “practices of similarly situated fiduciaries” differed from those of the allegedly imprudent plan. The court also found support for its analysis from out-of-circuit decisions in Albert v. Oshkosh Corp., 47 F.4th 570 (7th Cir. 2022) (discussed here); Smith v. CommonSpirit Health, 37 F.4th 1160 (6th Cir. 2022) (discussed here); and Matousek v. MidAmerican Energy Co., 51 F.4th 274 (8th Cir. 2022) (discussed here). Finally, because the duty to monitor claim was derivative of the breach of duty of prudence claim, it was also dismissed.

Proskauer’s Perspective

The decision is a positive development for plan sponsors because it shows that district courts outside of the Sixth, Seventh, and Eighth Circuits seem to be taking to requirements for alleging factual information sufficient to support the validity of comparisons between different plans. Notably, this is the second district court ruling in the Third Circuit in 2022 dismissing recordkeeping claims despite Sweda.


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