401(k) 2015 Year in Review

Retirement plan rule changes often don’t make waves beyond our corner of the business world, but in 2015 they made national headlines. The problem of excessive fees for retirement plan investments and advice garnered more attention last year, not only with the pending rule changes around fiduciary responsibilities but also in legal actions against plan sponsors and class action settlements in favor of retirement plan participants.

Here are some highlights from an active year for 401(k) plans.

New fiduciary rules

The proposal to update the rules around fiduciary standards for retirement advisors – requiring all advisors to plans to act as fiduciaries – dominated industry headlines and regulatory debate in 2015. The Department of Labor (DOL) received over 3,000 comments on the proposal throughout the year and held three days of open hearings in August for interested parties to air their concerns.

This kind of sweeping legislation will always bring out the vested interests seeking to shape the outcome of the new regulations. Plus, when there’s a lot of money at stake—to the tune of $24.7 trillion in total U.S. retirement assets according to the Investment Company Institute—you can be sure the industry heavyweights will make their opinions known to any legislator or regulator with the authority to affect the course of the debate.

Fund companies and brokerage firms criticized the proposal as harmful to individual investors and disruptive to their business models. Swarms of industry lobbyists sought to sway opinion against the new rules and promoted legislative maneuvers to derail the proposal. (An attempt to “defund” the proposal was discussed but scrapped during the recent Congressional budget negotiations.) Supporters of the new rules were active and vocal throughout the debate. But the revised fiduciary definition won’t change their businesses much; many have already adopted more rigorous standards of care for clients and plan participants.

As of right now, it looks possible that the DOL’s proposal – with revisions based on feedback received – may become reality in 2016. Opponents are already lining up contingency plans to defend their business models from the crisis they see coming as the result of the pending legislation. Most importantly, if the new regulations are passed, the retirement planning landscape will change for plan sponsors and trustees in the coming year. Having a trusted and knowledgeable advisor to call on will help you make sense of the new environment.

Tibble v. Edison

The Supreme Court’s (very rare) unanimous decision in this case, announced in May, was the other huge story in 2015. The high court ruled that plan sponsors have an ongoing fiduciary duty to monitor plan investments and invalidated the lower court’s decision to apply a statute of limitations on these responsibilities. What I see interesting in this decision is how different parties can interpret ERISA law and retirement plan legislation in different ways. These varying opinions can make life complicated for a plan sponsor and fiduciary. That’s why I recommend that plan sponsors err to the conservative side when applying the fiduciary standard of care and prudent man rule to their responsibilities.

Class action settlements

2015 saw two big-ticket settlements of class action lawsuits over excessive fees for 401(k) investment options. The first settlement came in February, with Lockheed Martin’s $62 million payment to end litigation that included over 100,000 plan participants. In August, a second class action case closed when Boeing paid a $57 million settlement to plaintiffs alleging a failure to carry out fiduciary duties to monitor and disclose fees in 401(k) investments.

The $32 million settlement of the Novant class action lawsuit in November caught my eye because of its early conclusion and possible motivations. Usually, retirement plan cases drag on for up to eight years, especially for class action suits. (The Boeing case, mentioned above, was at least a decade old.) Settling just over a year after filing, even before arguments were made in court, signaled the potential desire by the plan’s trustees to avoid personal liability for dereliction of their fiduciary duties.

More highlights from 2015

The IRS expanded the questions on Form 5500 in 2015 to focus on compliance with federal tax laws. Responses to these questions are optional, but the IRS “strongly encourages” retirement plan sponsors to answer them. I would say skipping these “optional” questions is not really an option for plan sponsors.

In another part of the government agency universe, the DOL’s Employee Benefits Security Administration (EBSA) released the results of a study of retirement plan audits. They found a majority of plan audits had followed professional standards or only had minor deficiencies. But nearly 40 percent of plan audits reviewed had “major deficiencies” according to EBSA.

What’s ahead for 2016?

The fiduciary rule changes, expected to be announced in 2016, will have the biggest impact on retirement plan sponsors this coming year. Plus, I expect the number of class action lawsuits and settlements around excessive plan fees to continue.