In this review of retirement policy developments in 2021, we begin with a review of retirement finance – interest rates, securities markets, and (an emerging risk) inflation – all of which affect retirement finance and participant retirement income. We then discuss major retirement-related legislative and regulatory initiatives. We conclude with a discussion of some significant developments in retirement plan litigation.
Retirement finance and retirement income security at year end
Throughout the year, we have followed the performance of the interest rate and securities markets, tracking their effect on retirement finance. As of mid-December, interest rates are up 30-40 basis points for plans with typical duration, and the S&P 500 is up 25% on the year. The October Three Pension Finance Update , which tracks a typical defined benefit plan with a 60/40 asset allocation, shows plan funding up over 10% on the year.
The effect of inflation on retirement finance and retirement income
A major, emerging pension finance story for the year, however, has been inflation. The November Consumer Price Index showed an increase of 6.8% over the last 12 months. At the end of October, we published an article analyzing the effect of inflation on retirement finance and retirement income . Our critical takeaways were:
In DB plans : Inflation does not directly affect sponsor finance, but expected future inflation will increase interest rates, reducing liability valuations. Inflation will also affect stock market and (especially) bond market performance. For participants, increases in the CPI directly reduce the value/buying power of participant/retiree annuities.
In DC plans : Increases in the CPI directly reduce the value of a fixed dollar annuity, making the annuitization decision (when and whether to annuitize) especially consequential and sensitive to inflation volatility/risk. Sponsors considering offering an annuitization option will want to consider communicating to participants about this risk and the possibility of making available counter-inflation investments that may hedge it.
Tracking the effect of interest rate and asset performance and inflation on retirement income : We have (throughout the year) tracked the effect of interest rate and securities market performance and of inflation on participants’ retirement income – both in DB and DC plans. Here are (near) year-end numbers for our example 35- and 55-year old participants, compared with a DB retiree. Numbers are given in 2020 dollars, to pick up the effect of inflation on buying power.
Build Back Better Act : At year-end, it looks like FY2022 budget reconciliation legislation, the Build Back Better Act (BBBA), will, if passed, have only a limited effect on retirement policy. Under the current version of BBBA:
Pension income exempt from the corporate AMT : The latest (Senate Finance Committee) version of the BBBA includes a provision that would generally exempt corporate financials’ DB “pension income” from the proposed corporate Alternative Minimum Tax of 15% on “adjusted financial statement income” for corporations with AFSI in excess of $1 billion. And DB contributions would be deductible (or not) under regular income tax rules.
DC/ IRA Contribution limit capped : Contributions to DC plans and IRAs would generally be prohibited where the total IRA and DC plan accounts of high earners exceed $10 million. Effective 2029.
Required distributions from large account balances : With respect to these accounts, in the year following the year in which the $10 million limit is exceeded, a minimum distribution of 50% of the excess would be required. Where the total in DC and IRA accounts exceeds $20 million, the lesser of that excess, or the total in Roth DC and Roth IRAs accounts, would have to be distributed from Roth IRAs and Roth DC accounts. Effective 2029.
DC reporting of large balances : DC plan administrators would be required to annually report to IRS, and to the participant, balances over $2.5 million. Effective 2029.
Elimination of Roth conversions for high earners and of nondeductible contributions : IRA and qualified plan Roth conversions for high earners would be prohibited beginning in 2032. Roth conversions of nontaxable amounts (that is, nondeductible contributions) would be prohibited beginning in 2022.
Outlook : It appears unlikely (as of this writing) that there will a Senate vote before year-end, and there is significant uncertainty whether there is a 50-Democrat Senate vote for the bill.
IIJA and ARPA extend DB funding relief : On November 15, 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA). The new legislation (among many other things) further extended 25-year average interest rate stabilization relief under ERISA’s DB plan minimum funding rules. This extension is on top of the extension adopted in March 2021 as part of the American Rescue Plan Act of 2021 (ARPA) . The table below summarizes the current 25-year average interest rate stabilization relief under ARPA/IIJA:
Interest rate stabilization under ARPA + IIJA — % reduction in 25-year average interest rate
|Applicable year||ARPA+IIJA reduction|
ARPA also put a 5% “floor” on each 25-year average rate and set all prior amortization bases to zero as early as 2019, changing to 15-year amortization (from 7-year) going forward. Finally, under ARPA, sponsors were allowed to elect not to have the higher ARPA rates apply to any plan year beginning before January 1, 2022.
As we discussed in our article Plan funding strategy after ARPA , the DB funding relief under ARPA and the IIJA will significantly reduce ERISA minimum funding requirements and limit the application of funding-related benefit restrictions. As a result, sponsors that are at the variable-rate premium (VRP) “headcount cap,” and thus can reduce VRPs simply by reducing participant headcount, will have more headroom to make such reductions, before minimum funding rules or benefit restrictions apply.
Bipartisan retirement policy reform initiatives : Several bipartisan retirement policy reform initiatives were introduced in Congress in 2021, the most significant of which was SECURE 2.0 (in the House) and Portman-Cardin (in the Senate). Highlights include:
SECURE 2.0 :a student loan repayment provision that addresses the nondiscrimination testing issue; a comprehensive “missing participant” solution (the Retirement Savings Lost and Found); a phased-in increase in the required minimum distribution (RMD) required beginning date from age 72 to age 75 (by 2032).
Portman-Cardin :a new 401(k) ADP testing safe harbor; an expansion of the Saver’s Credit (increase the income limits, make the credit refundable, and require that the credit be paid to an “applicable retirement plan”); an increase in the catch-up contribution; a limit on the IRS mortality improvement assumption; an extension of the period for DB surplus transfers to health and welfare arrangements; a number of changes easing RMD rules.
Other 2021 legislative initiatives include : The House Education and Labor Committee’s (November 2021) bipartisan Retirement Improvement and Savings Enhancement Act (RISE) , which addresses a number of the same issues as SECURE 2.0/Portman-Cardin, generally in a simpler and less technical way; and Chairman of the Senate HELP Committee Murray’s (D-WA) (July 2021) Women’s Retirement Protection Act (WRPA), requiring, among other things, that spousal consent for certain distributions from DC plans currently exempt from the spousal consent rules. Finally, we note that House Ways and Means Committee Chairman Neal’s (D-MA) Automatic Contribution Plan proposal , which would have required all but the smallest employers to adopt an automatic contribution retirement arrangement, was first included in, then removed from, the BBBA.
Confirmation of the Biden Administration’s nominee head of EBSA : President Biden has nominated Lisa Gomez to head DOL’s Employee Benefits Security Administration (EBSA) – arguably the key retirement policy official in the Administration. The nomination was approved by the Senate HELP Committee on December 2, 2021.
Fiduciary advice PTE temporary enforcement policy : On April 13, 2021, DOL released FAQs on its (December 2020) fiduciary advice PTE , providing additional guidance with respect to DOL’s fiduciary advice prohibited transaction exemption. Highlights of the FAQs include: the fiduciary policy with respect to rollovers is effective February 16, 2021; clarification of required documentation with respect to rollover advice; additional guidance with respect to conflict mitigation and the importance of compensation policy. DOL also stated that it anticipates further action on fiduciary advice. (We provide a detailed treatment of the FAQs here .)
On October 25, 2021, the Department of Labor issued a Field Assistance Bulletin (FAB 2021-02) extending its temporary good faith enforcement policy for compliance with the requirements of its fiduciary advice PTE. The extension applies generally through January 31, 2022; with respect to certain required rollover documentation, it applies through June 30, 2022.( Our December 2020 article on the PTE provides an extensive discussion of the issues it presents for plan sponsors .)
Lifetime income disclosure illustrations : In August 2020, DOL released an interim final rule (IFR) describing how this “lifetime income disclosure” was to be calculated , requiring (among other things) that the sponsor assume that the participant is age 67 (or her actual age if older) on the statement date. In July 26, 2021, guidance DOL indicated that it was reviewing comments on certain controversial aspects of the IFR and “intends to issue a final rule as soon as practicable based on feedback.” That guidance also indicated that the first mandatory lifetime income disclosure statements would have to be issued (by DC plans allowing participants to choose investments from a fund menu) no later than the quarterly statement for the second calendar quarter of 2022 (ending June 30, 2022).
Proposed revised ESG and proxy voting regulation : On October 13, 2021, DOL released a proposed regulation on “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (environmental, social, or governance (ESG) investing and proxy voting) , proposing to significantly revise the position taken by the Trump DOL at the end of 2020 on these issues. Highlights of the proposal include: a statement that prudent investment “may often require” consideration of ESG factors; elimination of strict documentation requirements for “tie-breaker” investment decisions; elimination of stricter requirements for inclusion of ESG investments in a QDIA; elimination of the two proxy voting policy safe harbors; elimination of special recordkeeping requirements for proxy voting decisions.
Missing participant guidance : On January 12, 2021, DOL published three documents providing guidance with respect to the treatment of missing participants : (1) a “Best Practices for Pension Plans;” (2) a description of its audit procedures under its Terminated Vested Participants Project (TVPP); and (3) Field Assistance Bulletin (FAB) 2021-01, announcing a nonenforcement policy with respect to transfers from terminating defined contribution plans to the PBGC’s program for terminating DC plans.
Cybersecurity guidance : On April 14, 2021, DOL released cybersecurity guidance for service providers (Cybersecurity Program Best Practices), plan sponsors (Tips for Hiring a Service Provider with Strong Cybersecurity Practices), and plan participants (Online Security Tips).
Remote consent : On June 25, 2020, IRS issued Notice 2021-40 , extending, through June 30, 2022, Covid-related temporary relief from the requirement that a spousal consent to a plan distribution be witnessed in the “physical presence” of a notary or plan representative.
IRS guidance on ARPA elections : On July 30, 2021, IRS released guidance on how and when to make elections under ARPA (see above) – generally by the end of the 2021 plan year.
Hughes v. Northwestern : The most important retirement plan litigation development in 2021 was the Supreme Court’s decision to review the Seventh Circuit’s decision (in favor of defendants) in Hughes v. Northwestern . Hughes is an ERISA fiduciary lawsuit that raises a number of the persistent issues presented by 401(k) fee litigation. (The case itself involves a 403(b) plan, but the parties have all agreed that the principles applicable are nearly identical to those raised in 401(k) fiduciary litigation.) In Hughes (as in typical 401(k) fee litigation), plaintiffs alleged that the plan fund menu included higher cost funds notwithstanding that there were other “identical” (or nearly identical) lower cost funds available. The Seventh Circuit sided with defendants, finding “that plans may generally offer a wide range of investment options and fees without breaching any fiduciary duty.” In oral argument (December 6, 2021), Supreme Court Justices focused on a critical and disputed issue in 401(k) prudence litigation: What are the minimum pleading standards for a 401(k) fee case based on breach of the duty of prudence and, critically, is it sufficient (at the motion to dismiss stage) merely to show that there were other, lower-cost funds available? A decision in Hughes is expected in 2022.
401(k) fiduciary litigation – “underperformance” – current issues : We are seeing a number of cases involving claims by 401(k) participants that fiduciaries violated their ERISA fiduciary duty of prudence because they chose or retained an “underperforming” fund/funds (especially underperforming target date funds). A critical issue in these cases, and for sponsor fiduciaries, is: what is the correct “comparator” against which to judge underperformance? We discuss the issues involved in these claims and lessons for plan sponsors in our article discussing the November 16, 2021, decision by the United States District Court for the Northern District of California in In Re LinkedIn ERISA Litigation . In LinkedIn the court allowed an “underperformance” claim to proceed with respect to the plan’s target date fund based on special features of the comparator selected (“same investment management firm, management team, and a nearly identical glide path”), while dismissing a claim with respect to another fund the comparator for which was simply the S&P 500.
Multiemployer plan withdrawal liability – Sixth Circuit strikes down “Segal Blend” : In a September 28, 2021, decision, a three-judge panel of the Sixth Circuit Court of Appeals upheld a lower court decision that ERISA prohibits a multiemployer plan from using the “Segal Blend” to determine the liability to the plan of a withdrawing employer . This is the highest court to address this issue. This result means, in the Sixth Circuit at least, that in many cases the withdrawal liability that a multiemployer plan may assess against withdrawing employers may be significantly lower than it has been in the past. Thus, this decision may have a significant effect on multiemployer plan withdrawal liability exposure, with implications both for ongoing management and company valuation.
Multiple employer plan litigation : Multiple employer plans (MEPs) are becoming a fee litigation target. In this litigation, two issues are emerging needing resolution by the courts: (1) who is the responsible fiduciary? and (2) for fee comparison purposes, what plans are comparable to a MEP? These issues are illustrated in ongoing litigation in Khan v. Pentegra , where the MEP service provider, rather than (as is typical in single employer fee litigation) the employer, was sued. And where the defendant challenged comparison of recordkeeping costs with single employer plans, arguing that “a MEP does not enjoy the same economy of scale as a single-employer plan with the same amount of assets.”
Cybersecurity litigation : Cybersecurity is emerging as a key fiduciary issue for both sponsors and providers. In this regard we note:
In Harmon v. Shell Oil Company (March 30, 2021) , the US District Court for the Southern District of Texas granted defendants’ motion to dismiss with respect to certain claims based on defendant plan recordkeeper’s use of plan participant data to “cross-sell” non-plan financial products to plan participants, finding, among other things, that participant data did not constitute plan assets.
On February 8, 2021, the US District Court for the Northern District of Illinois handed down a decision in Bartnett v. Abbott Laboratories , dismissing plaintiff’s claims against defendant sponsor fiduciaries in a case involving the theft of $245,000 in plaintiff’s Abbott retirement plan account. In an earlier (October 2, 2020) decision, the court had allowed plaintiff’s claim against Alight Solutions, LLC, which (among other things) administered the Abbott Benefits Center, to proceed. The court found, however, that the sponsor fiduciary’s monitoring of Alight was not imprudent, finding that the plan fiduciary need not hold a provider to a “standard of perfection” and that incidents of error by a provider not related to the plan are generally not significant to this sort of claim.