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Prudential Faces ERISA Self-Dealing Allegations in New Lawsuit

Thu, 2019-11-07 13:04

Prudential faces a self-dealing lawsuit filed by participants in its defined contribution (DC) retirement plan, alleging various fiduciary breaches under the Employee Retirement Income Security Act (ERISA).

Filed in the U.S. District Court for the District of New Jersey, the ERISA complaint names as defendants the Prudential Insurance Company of America, the Prudential Employee Savings Plan Administrative Committee, the Prudential Employee Savings Plan Investment Oversight Committee, and some 20 “John and Jane Does.”

At a high level, the suit alleges that the Prudential defendants put the interests of the company ahead of those of the plan “by choosing investment products and pension plan services offered and managed by Prudential subsidiaries and affiliates, which generated substantial revenues for Prudential at great cost to the plan.”

The text of the complaint opens with a general recitation of the increasingly important role of DC plans in the U.S. retirement system relative to defined benefit pensions, which are slowly but surely declining in prominence. According to the complaint, the potential for disloyalty and imprudence is “much greater in defined contribution plans than in defined benefit plans.”

“In a defined benefit plan, the participant is entitled to a fixed monthly pension payment while the employer is responsible for making sure the plan is sufficiently capitalized. As a result, the employer bears all risks related to excessive fees and investment underperformance,” the complaint suggests. “Therefore, in a defined benefit plan, the employer and the plan’s fiduciaries have every incentive to keep costs low and to remove imprudent investments. But in a defined contribution plan, participants’ benefits are limited to the value of their individual accounts, which is determined by the market performance of employee and employer contributions, minus investment expenses. Thus, the employer has no incentive to keep costs low or to closely monitor the plan to ensure that selected investments are and remain prudent, because all risks caused by high fees and poorly performing investments are borne by the employee.”

The complaint goes on to suggest that, for financial services companies like Prudential, the potential for imprudent and disloyal conduct is especially high, because the plan’s fiduciaries are in a position to benefit the company through the selection of the plan’s investments by, for example, filling the plan with proprietary investment products that an objective and prudent fiduciary would not choose.

Details from the Complaint

After this generalized argumentation, the complaint offers more particular facts about the alleged wrongdoing on the part of Prudential defendants. Among other things, plaintiffs allege that the defendants violated ERISA by “overpopulating the plan with proprietary mutual funds offered by Prudential and its affiliates, failing to monitor the performance of those funds, and failing to adequately disclose the amount of recordkeeping fees received by Prudential, resulting in the payment of grossly excessive fees to Prudential and significant losses to the plan and its participants.”

According to the complaint, by selecting Prudential-affiliated funds, the defendants placed Prudential’s interests above the plan’s interests.

“Instead of considering objective criteria like fees and performance to select investments for the plan, the investment oversight committee selected Prudential funds because they were familiar and generated substantial revenues for Prudential,” the complaint alleges. “Unaffiliated investment products do not generate any fees for Prudential. As a result, the committee chose many Prudential funds to benefit Prudential, the sponsor of the plan, without investigating whether plan participants would be better served by investments managed by unaffiliated companies. This is unsurprising, given that Prudential serves as the plan’s recordkeeper, and the plan utilizes a revenue-sharing arrangement to pay the majority of its administrative expenses.”

According to plaintiffs, as Prudential itself performs all recordkeeping and administrative functions for the plan, as well as manages a significant number of the plan’s investments, Prudential receives additional revenue in the form of direct participant fees and indirect fees via revenue sharing.

“Exacerbating the problems arising from these severe conflicts of interest, several of the unaffiliated investment options offered to plan participants were egregiously expensive and generally underperformed compared to benchmarks selected by the investment oversight committee.

Other Cases Show Facts Matter Most

This is far from the first self-dealing lawsuit to be filed against prominent recordkeeping and investment product providers in recent years under ERISA. Just to name a few other providers, Transamerica, Morgan Stanley and Franklin Templeton have all faced self-dealing suits. The outcomes of those cases—some of them are still pending—shows the results of the new Prudential case will very much hinge on the facts discovered both ahead of and potentially after the summary judgement phase.

For example, in Transamerica’s case, a judge has denied the fiduciary defendants’ motion to dismiss a lawsuit accusing the company of retaining poorly performing proprietary fund portfolios in it 401(k) plan. In denying the dismissal motions from Transamerica, the judge in the case wrote that, “regardless of whether an investment is affiliated with the fiduciary, the fiduciary has an obligation to act prudently in monitoring the underlying investments.” Here, plaintiffs’ complaint sufficiently alleges that the selection and retention of “substandard investment portfolios” constituted imprudent conduct.

On the other hand, Morgan Stanley this year successfully argued for dismissal of a 401(k) plan self-dealing suit filed by one of its employees. In that matter, the court decided the plaintiffs did not have standing to sue regarding the funds in which they did not invest, and they did not sufficiently prove their other claims.

Franklin Templeton, for its part, chose to settle rather than continue to fight its own self-dealing challenge once a federal district court moved forward most of the plaintiffs’ claims. In the end, Franklin Templeton did not admit to any wrongdoing, but it still agreed to pay nearly $14 million in damages and to provide certain non-monetary relief in terms of the future operations of the plan.

The post Prudential Faces ERISA Self-Dealing Allegations in New Lawsuit appeared first on PLANSPONSOR.

Categories: Industry News

IRS Proposes Update to Mortality Tables Used to Calculate RMDs

Thu, 2019-11-07 11:23

The IRS has issued a notice of proposed rulemaking providing guidance relating to the life expectancy and distribution period tables that are used to calculate required minimum distributions (RMDs) from qualified retirement plans, individual retirement accounts (IRAs) and annuities, and certain other tax-favored employer-provided retirement arrangements.

An Executive Order signed on August 31, 2018, directed the Secretary of the Treasury to examine the life expectancy and distribution period tables in the regulations on RMDs from retirement plans and determine whether they should be updated to reflect current mortality data and whether such updates should be made annually or on another periodic basis. The purpose of any such updates would be to increase the effectiveness of tax-favored retirement programs by allowing retirees to retain sufficient retirement savings in these programs for their later years.

The life expectancy tables and applicable distribution period tables in the proposed regulations reflect longer life expectancies than the tables in the existing regulations. For example, a 70-year old IRA owner who uses the Uniform Lifetime Table to calculate RMDs must use a life expectancy of 27.4 years under the existing regulations. Using the Uniform Lifetime Table set forth in the proposed regulations, this IRA owner would use a life expectancy of 29.1 years to calculate RMDs.

The life expectancy and distribution period tables in the proposed regulations have been developed based on mortality rates for 2021. These mortality rates were derived by applying mortality improvement through 2021 to the mortality rates from the experience tables used to develop the 2012 Individual Annuity Mortality tables (which are the most recent individual annuity mortality tables).

The life expectancy tables and Uniform Lifetime Table under these proposed regulations would apply for distribution calendar years beginning on or after January1, 2021. Thus, for example, for an individual who attains age 70½ during 2020 (so that the RMD for the distribution calendar year 2020 is due April 1, 2021), the final regulations would not apply to the RMD for the individual’s 2020 distribution calendar year (which is due April 1, 2021), but would apply to the RMD for the individual’s 2021 distribution calendar year (which is due December 31, 2021).

The document includes proposed amendments to the income tax regulations under section 401(a)(9) of the Internal Revenue Code (Code) regarding the requirement to take RMDs from qualified trusts. They also apply with respect to the corresponding requirements for individual retirement accounts and annuities described in section 408(a) and (b), and eligible deferred compensation plans under section 457, as well as section 403(a) and403(b) annuity contracts, custodial accounts and retirement income accounts.

A public hearing is scheduled for January 23, 2020, and the IRS is requesting comments on its proposals. Text of the notice of proposed rulemaking is here.

The post IRS Proposes Update to Mortality Tables Used to Calculate RMDs appeared first on PLANSPONSOR.

Categories: Industry News

Fidelity Tool Helps Drive Total Employee Well-Being

Thu, 2019-11-07 03:30

Fidelity Investments announced the availability of the Fidelity Total Well-Being solution, a tool that allows employers to optimize their benefits platform by providing a detailed analysis of employee benefit needs across the four domains of well-being: health, money, work and life.

While other solutions focus on diagnostics and recommendations to address individual silos such as financial wellness or physical and emotional wellness, Fidelity says its holistic approach provides employers with a deeper understanding of the needs and challenges facing their workers in all aspects of their lives.

Pearce Weaver, senior vice president with Fidelity Workplace Consulting, tells PLANSPONSOR, “One of the biggest drivers for creating this tool have been meetings with some of our larger clients, initially discussing financial wellness. But, clients kept saying, ‘That’s great but we’ve been collecting all these programs and point solutions and resources to cover a much broader array of wellness.’” Weaver says clients were struggling to connect employees with different resources in a way that is timely and relevant to them. Clients told Fidelity if it could measure overall well-being of employees it would help to direct employees to more relevant resources.

According to Weaver, though the solution tends to fit larger employers with more complex benefits programs, the Total Well-Being solution is available to clients of any size.

The new solution enables employers to tailor a workplace benefits and communications strategy that will have the greatest impact to employees, contribute to increased benefits engagement and support desired business objectives. The solution helps employers in three critical benefits management activities:

  • Quantify employee well-being and identify and prioritize opportunities to improve;
  • Evaluate the impact and potential of specific benefit plans and programs; and
  • Connect employees with employer-provided benefits that can best improve their well-being.

The Total Well-Being solution consists of three key components:

  • Employee Total Well-Being Assessment: Consists of a 10- to 15-minute survey for employees that provides insight to factors that contribute to, or detract from, their well-being. Developed with leading academic institutions, the assessment can help determine where an employee’s benefits needs may be unmet.
  • Personalized Employee Action Plan: Provides each employee with real-time individual Total Well-Being scores along with suggested benefits to consider that may help to improve their well-being. Weaver explains that when Fidelity fully customizes the personal scorecard it is to each employer’s benefit program. The suggestions are to a specific set of resources the employer provides.
  • Employer Analytics Dashboard: Enables employers to drill into the data to answer critical benefits strategy questions and build business cases for changes. Employers can also compare their results against Fidelity’s national data benchmark.

According to Weaver, the Dashboard was built to be very flexible so whatever type of indicative HR data the employer wants to provide Fidelity can use to give different cuts of data. At a high level, data can be sorted by gender, generation, marital status, whether the employee has children or job class, among others.

As an example of a cohort analysis, he says employers may see that Millennials in a particular income range that have student debt have lower financial wellness scores. That could be a business case for offering student loan help.

However, Weaver points out that there is an interconnectedness of domains. “We’ve found that being unwell in one area—say financial wellness—can impact other areas, such as physical wellness or life wellness,” he says. “If an employer only focuses on one domain, it could be missing information about wellness in other areas.”

Weaver says it seems like a universal area in which employers are struggling—they’ve made investments in lots of resources and have challenges in driving employees to those resources. “Anything employers can do to differentiate themselves, will help attract, engage and retain employees,” he notes.

The Total Well-Being solution was developed by Fidelity’s behavioral scientists and leading academic psychologists as well as feedback from Fidelity clients. The Fidelity Total Well-Being offering is currently available to employers in the U.S. with availability for additional countries in 2020.  For more information, current Fidelity clients can contact their Managing Director, while non-Fidelity clients are welcome to contact Fidelity Workplace Consulting at for more information.

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Categories: Industry News