This Issue - Article Summaries

Fiduciary and Plan Governance

Texas District Court's Decision in 401k Case Has Wide-Ranging Implications for Plan Fiduciaries

On January 10, 2025, the U.S. District Court for the Northern District of Texas ruled in the case of Spence v. American Airlines, Inc., finding that fiduciaries of two American Airlines 401k plans breached their duty of loyalty. The court concluded that the fiduciaries failed to adequately monitor and address the impact of BlackRock Institutional Trust Company's use of shares in the plans' index funds to further its Environmental, Social, and Governance initiatives, prioritizing socio-political outcomes over financial returns. This ruling marks a significant development in the ongoing debate regarding ESG investments within retirement plans and raises important implications for ERISA fiduciaries and plan sponsors.

Source: Jw.com

Fiduciary Committees as Parties to a Vendor Contract

Practitioners often advise creating a fiduciary committee to manage ERISA-covered employee benefit plans for several reasons. By designating the committee as the responsible party for functions like plan administration, monitoring, and compliance, the governance structure aligns with the contractual responsibilities. This approach can help differentiate the committee's role from that of the company or individuals, potentially shielding them from being treated as fiduciaries to the plan and managing liability risks.

Source: Morganlewis.com

Switching Your 401k Plan's Service Providers: A Guide for a Smooth Transition

Plan sponsors face various challenges when deciding to switch service providers for their employee benefit plans. Signs that it may be time to switch include high fees, inadequate data security, poor performance, or integration issues. Although the transition can seem daunting, utilizing provider reviews and trusted guides can facilitate the process. Once the decision to switch is made, careful planning is essential. Here are some key steps to consider for a smooth transition.

Source: Eisneramper.com

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Court and Legal

Issues to Watch in 2025's ERISA Litigation Landscape

In 2024, there was a notable increase in class action filings under ERISA, with 136 new cases, which is higher than in 2023 but still below the 2020 record of over 200. The continuation of this trend into 2025 will likely hinge on the resolution of key legal issues. This Law360 article by Groom principals discusses what to expect for ERISA litigation in 2025, highlighting potential increases in health plan litigation, developments in excessive fee and forfeiture cases, as well as pension plan litigation.

Source: Groom.com

An Emerging Trend in ERISA Class Action Litigation: 401k Forfeiture Suits

Recently, there has been an increase in ERISA class actions challenging the practice of using 401k plan forfeitures, which occur when employees leave before employer contributions vest. Traditionally, these forfeited amounts remain within the 401k plan and can offset future employer contributions, a practice deemed acceptable by regulatory guidance. However, plaintiffs are now arguing that this practice violates various ERISA provisions. Over 30 lawsuits have been filed against companies of all sizes, though none have reached a final judgment yet. Given the nascent state of these claims and the unclear legal landscape, plan sponsors and fiduciaries must adopt risk mitigation strategies. This should include reviewing their plan's forfeiture terms to ensure compliance with plan provisions.

Source: Hklaw.com

"Disloyal, Not Imprudent": Is the American Airlines Decision Consistent With ERISA?

A Texas federal district court has ruled that American Airlines breached its fiduciary duty of loyalty but not its duty of prudence regarding its $26 billion 401k plan, which was influenced by environmental, social, and governance strategies. The court concluded that the airline's engagement with BlackRock for managing assets violated the fiduciary requirement to act in the best interests of plan participants, as outlined in ERISA. However, the court found insufficient evidence to prove a breach of the prudence rule, stating that American Airlines acted consistently with industry practices. This decision highlights a controversial distinction between loyalty and prudence, which critics argue is inconsistent with ERISA's statutory obligations since both are integral to a fiduciary's duty under ERISA section 404(a)(1)(A).

Source: Cohenbuckmann.com

Cornell Retirement Plan Dispute Tees Up Circuit Split at SCOTUS

The US Supreme Court will hear arguments regarding Cornell University's retirement plan, which may clarify the requirements for employees challenging 401k service provider fees under ERISA. The case addresses whether plaintiffs must include exemptions for prohibited transactions in their complaints or if these are defenses the plan fiduciary must prove. The outcome could significantly impact workers' ability to pursue claims against retirement plan service providers, with a ruling against Cornell potentially opening the door for more claims and settlements, while a ruling in favor could hinder efforts to address management issues.

Source: Groom.com

The Cornell Prohibited Transaction Case is ERISA's Most Absurd Case: Opinion

The Encore Fiduciary Guide discusses the Schlichter firm's appeal to the Supreme Court after losing an excessive fee case against Cornell University. They aim to reframe their claim from fiduciary imprudence to a prohibited transaction, avoiding the need to prove that fees are excessive. If successful, this could lead to an increase in ERISA class action abuses, granting plaintiff law firms the ability to conduct audits on any plan sponsor. This marks a significant shift in ERISA litigation, with plaintiff firms moving away from claims of participant advocacy and focusing on litigation tactics.

Source: Encorefiduciary.com

Get a Grip Over Hiring an ERISA Attorney

The author, a lawyer, acknowledges the negative reputation lawyers often have, which can deter plan sponsors from hiring them, particularly ERISA attorneys. Despite the common jokes and stereotypes about lawyers, the author argues that it's important for retirement plan sponsors to overcome their apprehension and seek the assistance of an ERISA attorney when necessary. The article aims to explain the circumstances and reasons for hiring such legal expertise.

Source: Jdsupra.com

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Legislative or Washington DC

Senate HELP Looks at Key Retirement Policy Priorities

During a January 22 hearing, the Senate Committee on Health, Education, Labor and Pensions (HELP) outlined key priorities for the current congressional session, with a focus on retirement-related issues. Their priorities include improving benefits portability, redefining "independent contractor," ensuring adequate funding for the Pension Benefit Guaranty Corporation, reforming pharmacy benefit managers, and addressing the rising costs of prescription drugs.

Source: Asppa-net.org

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Cyber and Plan Security

Seven Cybersecurity Predictions for 2025

In 2024, cybercrime surged, becoming a top concern for business leaders, with a CFO Magazine survey indicating ransomware attacks as the primary worry for C-Suite executives. Additionally, 45% of cybersecurity leaders cited cyber incidents as the most feared source of business disruption. This trend is underscored by significant data, including $9.5 trillion in global cybercrime damages, a 10% rise in the average data breach cost to $4.88 million, a 1,265% increase in phishing emails, and a 30% rise in overall cyberattack frequency across industries. As new technologies and techniques are rapidly weaponized, cybersecurity threats are expected to escalate further in 2025. The article presents seven predictions regarding trends in cybercrime, organizational priorities, and the regulatory landscape to help businesses formulate their cybersecurity strategies for the upcoming year.

Source: Pkfod.com

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Compliance and Regulatory

Electronic Delivery of Participant Notices

Plan participants must receive notices and disclosures about their 401k plans securely and promptly. Traditional paper delivery is costly and not preferred by many, with most people rarely reading such notices in paper form. While paper notices can still be distributed at meetings or mailed, placing them in common areas isn't sufficient. The e-Disclosure Safe Harbor Rule allows for electronic delivery as the default method, provided that participants can be reached electronically and receive proper initial notifications. This offers a more efficient and less expensive alternative for communicating important plan information.

Source: Consultrms.com

A Deficient Form 5500 Filing is Preferable to a Delinquent Filing

At the AICPA National Conference, Marcus Aron, the Chief of the Division of Accounting Services at the DOL's Employee Benefit Security Administration, provided an update, joined by Scott Albert from the Division of Reporting and Compliance. Marcus discussed the complex issue of filing Form 5500 in situations where the audit cannot be completed by the deadline, addressing the challenges and considerations involved in such scenarios. They clarified the distinction between delinquent filings, which are late, and deficient filings, which are timely but inaccurate or incomplete. Aron emphasized the importance of understanding these differences in the context of compliance.

Source: Belfint.com

Everything Retirement Plans Need to Know About Hardship Distributions

A retirement plan may permit participants to access their accounts through hardship distributions if they face an immediate and significant financial need, regardless of how the need arose. The Plan Document specifies which funds are available for such distributions, typically including employee elective deferrals, vested employer matching contributions, and employer nonelective (or profit-sharing) contributions.

Source: Withum.com

Withholding Requirements for 401k Plan Distributions

The withholding of federal and state income taxes on 401k retirement plan distributions varies based on the distribution type and state regulations. Some states have mandatory withholding requirements, while others allow voluntary withholding or do not impose state income tax at all. Federally, pre-tax employee contributions and employer contributions face a mandatory 20% income tax withholding, though there are specific circumstances where this may not apply. This article examines the withholding requirements for 401k plan distributions.

Source: Withum.com

DOL Releases Final Rule for Self-Correction Under the Voluntary Fiduciary Compliance Program

On January 14, 2025, the DOL released final rules updating the Voluntary Fiduciary Compliance Program for the first time in nearly two decades. Key changes include the introduction of a self-correction feature allowing retirement plan sponsors to rectify issues related to the late transmittal of participant contributions and loan repayments, which are common operational failures. Additionally, the self-correction procedures extend to certain participant loan issues that qualify for correction under the IRS's Employee Plans Compliance Resolution System.

Source: Ogletree.com

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Marketplace News

Trump Names Acting Secretary for Department of Labor

Allianz Life Retirement Solutions Now Available Through Morgan Stanley

This eNewsletter is a digest of information published by a variety of web-based sources on 401k and related issues and is published as a service to our users. 401khelpcenter.com, LLC is not the author of the material unless specifically noted.