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Quarterly Fiduciary Focus – Q4 2019 Recap

By: Marek Pfeil, CFA – Managing Director



Social Security Gets a Boost

Contribution Limits Increase

Is Participant Data a Plan Asset?

Required Plan Amendments

SEC Guidance on Proxy Voting

Legal Highlights


The SECURE Act Becomes Law

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019, and it became the most significant piece of legislation impacting retirement plans since the Pension Protection Act of 2006. The SECURE Act was initially passed by the House of Representatives in May 2019 but stalled in the Senate after three Senators objected to some of its provisions. To help get it through Congress, the legislation was attached to a must-pass $1.4 trillion spending bill for fiscal year 2020. The broad goal of the law is to promote retirement savings for employees and enhance financial security for retirees.

The SECURE Act is pretty broad in scope, containing nearly 30 retirement provisions. Below are some of the more important ones:

  • Safe harbor for annuities — Section 204 of the Act gives 401(k) plan sponsors safe harbor protection to include annuities in their investment offerings. This section protects the employer from getting sued if the annuity provider were to go out of business or defraud plan participants.
  • Lifetime income disclosures — This requires participants to receive an estimate of their projected monthly income in retirement, given their current account balance and other assumptions.
  • Tax credit for new plans — Employers starting a new retirement plan will be able to use a $5,000 tax credit (an increase from $500). Those who implement an auto-enrollment feature in their plan design will be eligible for an additional $500 credit per year for up to three years.
  • Open Multiple Employer Plan (MEP) — This provision is meant to make it easier and more economical for small employers to offer a retirement plan to their employees by allowing two or more unaffiliated companies to join a pooled employer plan. Small plans will now be able to band together to receive similar benefits as larger plans, which typically means lower recordkeeping fees, greater investment flexibility, and better administrative support.
  • Access for long-term part-time workers — Previously employers could exclude part-time workers from contributing to their company’s retirement plan. Under the new law, part-time workers who work at least 500 hours for three consecutive years (12-month periods) will be allowed to make deferral contributions. However, this group of employees may still be excluded from employer contributions. This provision will create new administrative and recordkeeping challenges.
  • Required Minimum Distributions — The age at which retirement plan participants will be required to take a minimum distribution has been pushed back from 70 ½ to 72 years.

Bottom line – Most of the provisions in the SECURE Act are effective January 1, 2020, while others, such as provisions regarding open MEPs, in-plan annuity features and access for long-term part-time workers, will have longer implementation timelines. Plan sponsors should consult with their retirement plan advisers or ERISA attorneys to make sure their plans are in compliance.1

Social Security Benefits Get a Boost

Individuals receiving Social Security benefits are getting a 1.6% boost to their paychecks in 2020. The Social Security Administration announced the cost of living adjustment (COLA) in October 2019. The adjustment is tied to the Consumer Price Index, as determined by the Department of Labor’s Bureau of Labor Statistics. Individuals can check their COLA notice online at

Contribution Limits Increased

The Internal Revenue Service (IRS) announced in November new contribution and benefit limits for 2020. Employees participating in 401(k), 403(b), most 457 plans and the government’s Thrift Savings Plan will be able to contribute $19,500 in 2020, an increase of $500 from 2019. The catch-up contribution limit for employees over the age of 50 increased from $6,000 to $6,500. The complete list of contribution changes was published in Notice 2019-59 and can be viewed on the IRS website at

Is Participant Data a Plan Asset?

Several recent lawsuits questioned whether participant data is a plan asset. As currently written, ERISA does not specifically address this topic. However, settlements from a number of recent class-action lawsuits suggest that plan sponsors may want to take a proactive approach in this area and establish some guidelines to address it.

In a lawsuit against Northwestern University, the trial court ruled that participant data is not a plan asset, however, that ruling has been appealed. Two other universities that settled their respective lawsuits, Johns Hopkins and Vanderbilt, agreed to ban record keepers from using participant data for cross-marketing purposes. Participants still have the option to opt-in and receive information about other products and services from the record keepers.4

Bottom line – Although the settlements of the lawsuits mentioned above do not have legal weight, plan sponsors should review these outcomes and determine the appropriate approach for their plan.

Required Plan Amendments

In December 2019, the IRS published Notice 2019-64, which outlines a list of required amendments that plan sponsors must adopt. Generally, plan sponsors have until December 31, 2021 to adopt the amendments on the 2019 required amendment list. One of these required amendments pertains to the finalized hardship withdrawal rules that were included within the Bipartisan Budget Act of 2018.5

The new hardship provisions are a little more lenient than their previous version. Participants will now be able to more easily certify their hardship through a written statement or electronically, stating they have insufficient cash or other liquid assets to meet their financial hardship. Employees are also no longer required to suspend making their salary deferrals after the receipt of their hardship. Lastly, participants do not have to max out their nontaxable loans before claiming a hardship distribution.

Bottom line – Plan sponsors need to actively monitor regulations impacting retirement plans and implement them accordingly.

SEC Guidance on Proxy Voting

In the fall of 2019, the Securities and Exchange Commission (SEC) issued guidance for all advisers registered under the Investment Advisers Act of 1940 regarding compliance pertaining to proxy voting. Under the Act, an adviser has three options with respect to their fiduciary responsibility for voting proxies: not assume any responsibility, assume only limited responsibility, or assume complete responsibility. Irrespective of the amount of responsibility an adviser takes on, they are required to provide full disclosure to the client about their proxy voting duties and receive consent with respect to how the relationship is shaped.

Defined contribution plan assets are typically held in a trust that is overseen by the plan sponsor, who ultimately holds the fiduciary responsibility for voting proxies of the mutual funds that are in the plan lineup. Most advisers are reluctant to take on the fiduciary responsibility for voting proxies, often leaving plan sponsors with more questions than answers. There are third parties who perform proxy voting, but the plan sponsor needs to perform a rigorous due diligence process when hiring a third-party proxy firm.6

Bottom line – The plan sponsor has a fiduciary duty, but not the obligation, to vote proxies. They should also understand their relationship with their adviser in this area. The details of this relationship may be spelled out in the client’s advisory agreement or the Investment Policy Statement (IPS).

Legal Highlights

The retirement industry remains a ripe place for legal action. However, many of the lawsuits being filed are focused on a similar set of issues: excessive fees, proprietary investments, and poor governance processes or oversight. The cases below represent only a sample of some of the more interesting ones that were filed in the fourth quarter.

Estée Lauder Sued Over Security Breach – This lawsuit highlights the risks that cyber fraud poses to plan sponsors. A former participant in the Estee Lauder 401(k) plan filed a lawsuit alleging that $99,000 was withdrawn from her account in three separate unauthorized distributions in September and October 2016. The lawsuit names as defendants Estee Lauder and the plan’s fiduciaries, Alight Solutions (formerly Hewitt Associates) as the plan’s record keeper, and State Street Bank & Trust as the plan’s custodian, for violating their fiduciary duties and not adequately protecting the participant’s account against unauthorized withdrawals.

The plaintiff noted in the filing that the defendants should have confirmed that the distributions were requested by the participant, provided advance notice of the distributions to the participant, and identified the distributions as fraudulent given that they were deposited to three different bank accounts not associated with the participant. The participant also accuses the plan committee of not providing her with requested plan documents, an ERISA violation.7

Bottom line – It’s safe to say that cybersecurity has become a very important issue for plan sponsors to pay attention to. Employers should strongly consider having a company-wide cybersecurity management plan. This should include an insurance policy covering cyber breaches, understanding the cybersecurity policy of their respective record keeper, and finally, educating their employees on best practices for protecting their data.

Prudential’s GoalMaker Solution Subject to ERISA Lawsuit – Participants in AutoZone’s retirement plan have filed a lawsuit against the company’s plan alleging ERISA breaches of imprudence and disloyalty. The class-action claim pertains specifically to Prudential’s GoalMaker asset allocation solution, which was designated as the plan’s default investment option. The GoalMaker service creates model portfolios for participants given their age to retirement and the underlying investment options in the retirement plan. Plaintiffs allege that AutoZone misrepresented the service, which used Prudential’s proprietary investment products and “paid kickbacks to Prudential.” The claim also states that these investment products were high-cost and underperformed lower-cost index funds in the plan’s investment menu, costing participants more than $60 million in retirement savings. The lawsuit notes that AutoZone “did not have the competence, exercise the diligence, or have in place a viable methodology to monitor the GoalMaker allocation service and investment options”.8

Bottom line – Plan sponsors need to have a process in place to monitor all investment options in the plan.

Fiduciary Corner

Acknowledging that Americans are living and working longer, the SECURE Act increases the required minimum distribution (RMD) age from 70½ to 72, applicable to distributions made after December 31, 2019, for individuals who reach 70½ beginning January 1, 2020. Americans will also have the option to keep contributing to individual retirement accounts after the age of 70½ (which was previously not allowed), as long as there is earned income to contribute in the first place.

Bottom line – Plan sponsors will need to evaluate the new RMD rules and generally amend plan documents to reflect the new RMD age of 72 in required provisions that govern the required minimum distribution rules. However, they still have the option to require distributions at an earlier age, for example, at normal retirement age.9