A U.S. Court of Appeals determined that arbitration on an individual basis is the proper forum for a participant’s claim that Charles Schwab breached its fiduciary duties and engaged in prohibited transaction under the Employee Retirement Income Security Act of 1974 (ERISA) by holding proprietary funds in its 401(k) plan.
The Internal Revenue Service has updated the Employee Plans Compliance Resolution System (EPCRS) to allow for the self-correction of more failures. EPCRS is a program that allows plan sponsors to correct errors involving qualified plans (such as 401(k) plans, profit sharing plans, defined benefit pension plans, etc.) and certain other types of plans that, if left uncorrected, could jeopardize the tax-favored status of the plan. Revenue Procedure 2019-19 expands the self-correction program to include correction of certain loan failures and more corrections via retroactive amendment.
Although the Trump administration has floated a general tax reform proposal, little detail has been provided. However, it is clear that additional revenue will be needed to fund the tax cuts the president proposed. Retirement plans are a likely target, as they were responsible for a reduction in federal revenues by $83 billion in 2016, according to the nonprofit Tax Policy Center.
Recent Supreme Court decisions permitting class action waivers in arbitration agreements opened the door to the question of whether such an agreement would be enforceable under the Employee Retirement Income Security Act of 1974 (ERISA). (See American Express Co. v. Italian Colors Restaurant and AT&T Mobility LLC v. Concepcion.) The wave of class action litigation over 401(k) and 403(b) fees has created a forum for addressing this question, and courts are beginning to provide an answer.
In an earlier post, I discussed the spread of 401(k) litigation and the fact that smaller plans were becoming targets for aggressive litigators. As the pool of large plans diminishes and the litigation theories become well-known, it is inevitable that the volume of 401(k) litigation will expand. Fortunately, most plan sponsors can avoid 401(k) litigation by taking a few obvious steps. Here are some suggestions.
For the past few years, we have been reading about litigation against large employers and financial institutions regarding fees charged to participant accounts in 401(k) plans. These lawsuits generally allege a breach of fiduciary duty under ERISA by selecting poorly performing funds that carry higher expenses than similar investment alternatives.