Employee Benefits Developments - July 2020

Hodgson Russ LLP

The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of July 2020. Click on the links below for more information on each specific development or case.

Department of Labor Issues Guidance on Inclusion of Private Equity Investments in Defined Contribution Retirement Plans

Department of Labor Issues Proposed Regulations Targeting ESG Investments

FAQs Provide Additional Coronavirus Guidance for Health Plans

Temporary Relief from Physical Presence Requirement for Spousal Consent Granted for 2020


Department of Labor Issues Guidance on Inclusion of Private Equity Investments in Defined Contribution Retirement Plans

In an effort to more broadly diversify their investments and potentially achieve higher rates of return than could be achieved solely through investing in the public markets, defined benefit plans have long made investments in private equity. However, largely due to concerns related to fiduciary liability, sponsors of defined contribution plans have avoided including exposure to private equity investments among a plan’s designated investment alternatives (“DIAs”). A recent information letter from the Department of Labor provides guidance to sponsors of defined contribution plans on the inclusion of private equity investments among a plan’s DIAs. The information letter provides ERISA’s fiduciary requirements are not violated solely due to the inclusion of private equity as a component of a defined contribution plan’s DIAs, but that inclusion of private equity implicates special fiduciary considerations.

The information letter does not address including an investment vehicle that allows participants to cause their plan account to be directly invested in private equity. Instead, the information letter concerns the inclusion of private equity investments as a component of a target date fund, target risk fund, or balanced fund. The information letter notes that, compared to public market investments, private equity investments (i) tend to involve more complex organizational structures and investment strategies, longer time horizons, and more complex, and typically, higher fees, (ii) be subject to different regulatory disclosure requirements, oversight, and controls, and (iii) involve more complex valuations due to there being no easily observed market value. Accordingly, in evaluating the risks and benefits associated with including private equity as a component of a DIA, the information letter provides that a fiduciary should consider the following:

  • Whether adding a target date fund, target risk fund, balanced fund or other asset allocation fund with a private equity component would offer plan participants the opportunity to invest their accounts among more diversified investment options over a long-term period and within an appropriate range of expected returns net of fees;
  • Whether any target date fund, target risk fund, balanced fund or other asset allocation fund is overseen by plan fiduciaries (using third-party investment experts as necessary) or managed by investment professionals that have the capabilities, experience, and stability to manage an asset allocation fund that includes complex private equity investments;
  • Whether any target date fund, target risk fund, balanced fund or other asset allocation fund has limited the allocation of investments to private equity in a way that is designed to address the unique characteristics associated with such an investment, and has adopted features related to liquidity and valuation designed to permit the asset allocation fund to provide liquidity for participants to receive distributions and direct exchanges among the plan’s investment line-up consistent with the plan’s terms;
  • The plan’s features and participant profile (e.g., participant ages, normal retirement age, anticipated employee turnover, and contribution and withdrawal patterns) and make a considered decision about whether the characteristics of a target date fund, target risk fund, balanced fund or other asset allocation fund align with the plan’s characteristics and needs of plan participants; and
  • Providing plan participants with adequate information regarding the character and risks of a target date fund, target risk fund, balanced fund or other asset allocation fund that includes a private equity component to enable them to make an informed assessment regarding making or continuing an investment in the DIA, especially in the context of a plan designed to comply with ERISA 404(c) or in which the DIA serves as a qualified default investment alternative for participants who fail to provide affirmative investment instructions for their plan account.

Regarding the valuation and liquidity factors in the third bullet point, the information letter observes that a plan fiduciary could require that private equity investments within a DIA not exceed a specified percentage. On this point, the Department noted that Securities and Exchange Commission rules applicable to registered open-end investment companies include a 15% limitation on illiquid investments. The information letter further suggests that a plan fiduciary ensure that private equity investments be independently valued and contractually require that additional disclosures be provided to meet ERISA’s disclosure obligations concerning the value of a plan’s investments.

Importantly, the information letter does not address any prohibited transaction issues that may arise as a result of the inclusion of a private equity component of a DIA. Plan fiduciaries should give careful consideration to any prohibited transaction implications associated with the inclusion of a private equity investment component in a DIA. Further, in light of the ongoing focus and litigation relating to fees being borne by defined contribution plan participants, plan fiduciaries should carefully weigh the potential benefits associated with a private equity investment against the commonly higher fees.


Department of Labor Issues Proposed Regulations Targeting ESG Investments

The U.S. Department of Labor has issued proposed regulations to clarify that retirement plan fiduciaries’ investment duties under ERISA require that selections of plan investments must be based solely on risk-adjusted economic valuations, and not non-pecuniary considerations. The proposed regulations address environmental, social and governance (ESG) investments, and state with no equivocation that the paramount goal for fiduciaries under ERISA retirement plans is the optimization of economic returns.

Under the most recent sub-regulatory guidance, the DOL appeared to take a more moderate view of ESG investments. Field Assistance Bulletin 2018-01 stated that plan fiduciaries “must not too readily treat ESG factors as economically relevant” and advised that “[i]t does not ineluctably follow from the fact that an investment promotes ESG factors . . . that the investment is a prudent choice for retirement or other investors.” While FAB 2018-01 warned plan fiduciaries against assuming ESG factors are economically relevant, it stated that, a properly diversified investment slate could include ESG investments.

The proposed regulations contain express language requiring that fiduciaries focus exclusively on pecuniary factors in choosing retirement plan investments. “Plan fiduciaries are not permitted to sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or any other non-pecuniary goals.” The additions to the “investment duties” regulations are incorporated into the duty of loyalty rules under ERISA § 404(a)(1)(A), as well as the duty of prudence standards. Thus, fiduciaries would be prohibited from “subordinating” the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.

Under the new rules, the presence of ESG funds on a retirement plan’s investment slate will require that such investments be “economically indistinguishable” from alternative investment options, a situation which the DOL considers will rarely occur. Thus, the proposed regulations require fiduciaries selecting ESG investments to satisfy heightened documentation and due diligence standards. In the context of choosing a QDIA, the proposed DOL rules expressly forbid selecting an ESG fund even if such a fund is selected by fiduciaries only on the basis of objective risk-return criteria consistent with the pecuniary standards under the new rules.

Finally, the preambles indicate a strong predilection on the part of the DOL towards low-cost or passively managed index funds. Thus, the proposed regulations suggest that the DOL’s intended enforcement reach may include scrutiny of actively managed strategies, not just ESG funds. Ultimately, the new rules when final potentially require plan fiduciaries to document and defend their investment policies more robustly, and to reexamine their investment slate in light of the broader array of available investment alternatives, including the low-cost or passively managed index funds apparently favored by the DOL.

Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, Financial Factors in Selecting Plan Investments, 85 Fed. Red. 39113 (June 30, 2020).


FAQs Provide Additional Coronavirus Guidance for Health Plans

The departments of Labor, Health and Human Services, and Treasury jointly prepared a new set of frequently asked questions (“FAQs”) regarding implementation of the Families First Coronavirus Response Act (“FFCRA”), the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and other related health coverage issues. Here is a link to the FAQs.

The FFCRA and CARES Act included provisions that generally require group health plans to cover certain items and services related to COVID-19 testing without imposing any cost sharing or prior authorization requirements during the emergency period. This new guidance provides some clarity on the applicability and scope of these laws. The issues addressed in the FAQs include:

Notice requirements

Under previous guidance, the Departments announced temporary relief to the generally applicable requirement for plans to provide 60 days advance notice of any material modification to the terms of a plan that would be reflected in the plan’s Summary of Benefits and Coverage. Specifically those changes made to increase benefits, or reduce or eliminate cost-sharing requirements, for the diagnosis and/or treatment of COVID-19 and telehealth or other remote care services during the public health emergency or national emergency declaration period related to COVID-19.

Under this new guidance, the Departments clarify that if a plan reverses these changes once the public health emergency is over, the Departments will consider a plan to have satisfied its notice obligation if the plan:

  • Previously notified the participant, beneficiary, or enrollee of the general duration of the additional benefits coverage or reduced cost sharing (such as, that the increased coverage applies only during the COVID-19 public health emergency); or
  • Notifies the participant, beneficiary, or enrollee of the general duration of the additional benefits coverage or reduced cost sharing within a “reasonable timeframe” in advance of the reversal of the changes.

Wellness programs

Wellness programs that require an individual to satisfy a standard related to a health factor to obtain a reward must provide a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining any reward to individuals for whom it is unreasonably difficult due to a medical condition, or medically inadvisable, to satisfy the otherwise applicable standard.

Under the new guidance, plans are permitted to waive a standard (including a reasonable alternative standard) for obtaining a reward under a health-contingent wellness program. However, to the extent the plan waives a wellness program standard as a result of the COVID-19 public health emergency, the waiver must be offered to all similarly situated individuals.

Coverage of at-home testing

COVID-19 tests intended for at-home testing (including tests where the individual performs self-collection of a specimen at home) must be covered, when the test is ordered by an attending health care provider. This coverage must be provided without imposing any cost-sharing requirements, prior authorization, or other medical management requirements.

No required coverage for employment purposes

Testing conducted to screen for general workplace health and safety (such as employee “return to work” programs), or for any other purpose not primarily intended for individualized diagnosis or treatment of COVID-19 or another health condition is not required by FFCRA.

In light of this new guidance, employers should confirm that they are appropriately notifying participants regarding changes to their health coverage and otherwise administering the group health coverage in a manner consistent with applicable law. (FFRCA – Part 43 FAQs)


Temporary Relief from Physical Presence Requirement for Spousal Consent Granted for 2020

In response to the COVID-19 pandemic, the Internal Revenue Service has granted relief from the physical presence requirement for a spouse consenting to certain distribution requirements under the Internal Revenue Code for plans subject to the qualified joint and survivor annuity requirements. The relief is effective for the period January 1, 2020 through December 31, 2020. Under the temporary relief, a consent that is witnessed by a Notary Public in a manner which is consistent with state law requirements allowing for remote notarization is permissible. In addition, temporary relief is granted from the physical presence requirement for certain elections which are witnessed by a plan representative. Under this provision, relief is granted if the individual signing the election presents a valid photo ID during the live audio-video conference. This photo ID may not be transmitted prior to or after the witnessing. Second, the audio-video conference must allow for direct interaction between the individual and the plan representative; pre-recorded videos are not sufficient. Third, the individual must transmit by fax or other electronic means a legible copy of the signed document to the plan representative on the same day that it was signed. Finally, after receiving the signed document, the plan representative must acknowledge that the signature has been witnessed by the plan representative and transmit the signed document, including the acknowledgement, back to the individual. To comply with this last requirement the individual that signed the document must have effective ability to access the electronic medium being used to transmit the acknowledged witnessed copy, and the individual must be permitted to request a paper copy at no charge and the paper copy must be provided on request. IRS Notice 2020-24.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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