Employee Benefits Developments - November 2019

Hodgson Russ LLP

The Employee Benefits Practice is pleased to present the Employee Benefits Developments Newsletter for the month of November 2019. Click through the links below for more information on each specific development or case.

2020 Benefit Limits Announced

Proposed Class Action Litigation Blocked By Mandatory Arbitration Agreement

DOL Proposal Would Open the Door to Electronic Delivery of Retirement Plan Notices/Disclosures

Dismissal of DOL’s Failure to Monitor Suit Was Appropriate Based On Retirement Committee’s Swift Action to Rectify Undiversified Trust

2020 Benefit Limits Announced

The Internal Revenue Service has announced the cost of living adjustments dollar limits applicable to benefit plans (see IRS Notice 2019-59). The key limits are listed below:

2019 Limit

2020 Limit

401(k)/403(b)/457 Plan Maximum Elective Deferral

$19,000

$19,500

401(k)/403(b)/457 Catch-Up

$6,000

$6,500

Defined Contribution Maximum Annual Addition

$56,000

$57,000

Defined Benefit Maximum Annual Pension

$225,000

$230,000

Qualified Plan Maximum Compensation Limit

$280,000

$285,000

Highly Compensated Employee

$125,000

$130,000

IRA Limit

$6,000

$6,000

IRA Catch-Up

$1,000

$1,000

SIMPLE Limit

$13,000

$13,500

SIMPLE Catch-Up

$3,000

$3,000

In addition, the Social Security wage base for 2020 will increase from $132,900 for 2019 to $137,700.

Proposed Class Action Litigation Blocked By Mandatory Arbitration Agreement

In a recent district court case out of the United States District Court for the Middle District of Florida, a former employee attempted to sue his former employer as part of a class action alleging the employer failed to provide adequate Consolidated Omnibus Budget Reconciliation Act (COBRA) Notices. The former employee alleges on behalf of himself and other similarly situated individuals that the employer failed to properly provide lawful notice of his ability to continue coverage under COBRA because the information provided was incomplete and was provided in a confusing, “piece-meal” manner. The court, however, granted the employer’s motion to dismiss the action and compel arbitration based on an arbitration agreement signed by the former employee when he was initially hired. This decision follows another recent decision enforcing the terms of a mandatory arbitration provision in the context of an employee benefit plan. Although avoiding a proposed class action lawsuit is a significant victory for the plan and employer, there are a number of questions as to how these provisions would affect the ERISA claims procedure process and the deference afforded to plan administrators’ decisions who follow those procedures. Grant v. JP Morgan Chase & Co. (M.D. Fla. 2019)

DOL Proposal Would Open the Door to Electronic Delivery of Retirement Plan Notices/Disclosures

In October, the Department of Labor (DOL) published a proposed rule that offers a new, additional electronic safe harbor option that retirement plan sponsors would be able to use to furnish notices and disclosure to participants and beneficiaries. (84 Fed. Reg. 56,894, 10/23/2019). Retirement plan sponsors who want to make notices and disclosures accessible on a website, rather than sending paper documents through the mail, would have the option of doing so, if they satisfy certain conditions. The DOL believes the proposed new rules would reduce the costs (an estimated $2.4 billion over the next 10 years) and burdens associated with the production and delivery of many of the notices and disclosures retirement plans are regularly required to furnish to participants and beneficiaries. Note that the new electronic safe harbor would not apply to notices and disclosures regularly required to be furnished by welfare benefit plans.

Current electronic disclosure rules relevant for retirement plan participants who are not “wired at work” prescribe an opt-in regime where such participants must affirmatively consent to receive documents and disclosures electronically. The DOL’s new proposed rules prescribe an opt-out regime (what the DOL calls a “notice and access” structure) under which a retirement plan would be permitted to make documents accessible online following electronic notice to a retirement plan participant or beneficiary with a valid electronic address (e.g., email address), unless the participant or beneficiary affirmatively opts out of electronic notice and access. The new proposed rule, however, would not eliminate the current electronic disclosure rules, and retirement plan sponsors would still be able to rely on the existing safe harbor for making electronic disclosures.

The proposed new safe harbor could be used to furnish “covered documents” that a retirement plan is routinely required to furnish to participants and beneficiaries under Title I of ERISA – documents such as pension benefit statements, summary annual reports, summary plan descriptions, summaries of material modifications, annual funding notices, fee disclosures, blackout notices, etc. However, certain documents (copies of retirement plan documents, trust agreements, etc.) that need only be furnished upon a written request from a retirement plan participant or beneficiary would not be covered under the proposed electronic safe harbor.

Under the new DOL proposal, an initial written (paper) notice would be sent to those “covered individuals” (participants, beneficiaries, etc.) who have an employer-assigned electronic address (e.g., work email) or who, as a condition employment, provide the employer or sponsor an electronic address (e.g., personal email address). The initial notice would explain that some or all covered documents will be furnished electronically to an electronic address (e.g., website/internet address), include a statement of the right to request and obtain a paper version of a covered document free of charge, describe the right to opt out of receiving covered documents electronically, and explain how to exercise those rights.

A second electronic notice (notice of internet availability) generally would be provided each time there is a new online document posting. The proposed rules also would allow retirement plans to consolidate notices of internet availability in limited circumstances. The notice would need to include, among other things, a brief description of the covered document to be made available online, an internet website address where the document is posted, and directions for requesting a free paper version of the document or opting out of receiving covered documents electronically.

These rules will not be available for implementation until after the DOL’s publication of a final rule, and the DOL has requested comments on the proposed rules which will be considered before the rule is finalized. The fact that the DOL is working toward a more modern, cost-effective rule for furnishing certain required notices and information to plan participants and beneficiaries is seen by many as welcome news. But there also are some critics of the proposed rule that have expressed concerns the rule will unfairly cut off access to plan information by certain demographic groups that may not be sufficiently tech savvy. The timeline for the DOL to finalize and publish a final new rule on electronic delivery of retirement plan notices and disclosures is not yet known.

Dismissal of DOL’s Failure to Monitor Suit Was Appropriate Based On Retirement Committee’s Swift Action to Rectify Undiversified Trust

As a result of a custodial trustee’s resignation, assets for Severstal Wheeling, Inc.’s (“Severstal”) two ERISA-covered retirement plans were transferred to a new trust. The retirement committee for the Severstal retirement plans (“Committee”) appointed a new investment manager, Ronald LaBow and his company WPN Corporation (“LaBow”), to invest the assets of the plans. An investment management agreement was executed in December of 2008, reflecting a retroactive effective date of November 1, 2008 to reflect the reality of the established relationship between the Committee and LaBow.

The Committee specifically instructed LaBow to have the Severstal trust mirror the asset allocation within the prior trust. Instead of following these instructions, LaBow acquired an account that consisted entirely of large cap energy stocks, making up 97% of the assets in the new Severstal trust. The Committee discovered on December 29, 2008 through the quarterly report of its consultant, Mercer Investment Consulting, that the Severstal trust was undiversified, and that LaBow had failed to follow the Committee’s instructions to acquire an allocation proportionate to that of the prior trust.

Thereafter, the Committee and its outside ERISA counsel engaged almost daily with LaBow regarding the reallocation of the assets in the Severstal trust to achieve diversification. During this particularly turbulent period in the markets, LaBow was not successful in reallocating the trust assets and ultimately sold the large cap energy stock account for cash in March, 2009. LaBow was fired in May, 2009 and Severstal ultimately prevailed in its lawsuit alleging that LaBow breached fiduciary duties under ERISA.

While the fiduciary breach lawsuit between Severstal and LaBow was pending, the federal district court stayed the DOL’s separate lawsuit alleging failure to diversify, co-fiduciary breaches and failure to monitor claims against the Committee and other co-defendants. Once the fiduciary breach judgment against LaBow was affirmed by the Second Circuit, the court issued a decision allowing the DOL lawsuit to proceed, but only based upon the Committee’s alleged failure to monitor LaBow.

In cross-motions for summary judgment, the DOL’s expert testified that the Committee should have communicated its investment allocation strategy to LaBow before the assets were transferred to the Severstal trust. She opined that the backdated investment management agreement was a “red flag” and that LaBow should have been fired earlier. In contrast, Severstal’s expert testified that the Committee acted reasonably and prudently by hiring two reputable investment consultants after discovering LaBow’s failure to diversify the Severstal trust. He further opined that given the volatility in the market, it was prudent for the Committee to be cautious in correcting LaBow’s misallocation, and in allowing additional time before terminating LaBow.

The district court’s memorandum opinion confirmed that the Committee’s authority to appoint an investment manager carried with it a duty to monitor LaBow. However, that duty to monitor does not encompass every investment manager decision, nor it is possible where the plan fiduciary could not have reasonably predicted the actions of its investment manager. Citing to DOL guidance, the district court indicated the following actions are encompassed within the duty to monitor:

  • the appointing authority must adopt routine monitoring procedures;
  • the appointing authority must adhere to the routine monitoring procedures;
  • the appointing authority must review the results of the monitoring procedures;
  • the monitoring procedures must alert the appointing authorities to possible deficiencies; and
  • the appointing authority must act to take required corrective action.

Significantly, the district court held (and the DOL conceded) that the Committee did not have actual notice of LaBow’s breach until it received the quarterly report from Mercer on December 29, 2008. No duty to monitor arose until that point, and the record was replete with evidence that the Committee and its ERISA counsel were engaged in overseeing LaBow on an almost daily basis thereafter until the large cap energy account was dissolved. Within this context and with the extreme volatility of the market, the court held that the Committee did not breach its duty to monitor and granted summary judgment in its favor.

The ruling is strong support for the proposition that retirement committees must institute proper monitoring procedures, review and evaluate the information reported through such processes, and take corrective action when necessary. Scalia v. WPN Corp., 2019 WL 4748052, W.D. Pa. Civ. 14-1494 (September 30, 2019)

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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