Lawsuits, legislation & SECURE 2.0: Top compliance trends employers need to know

Mercer recently provided an update on the legal, legislative and regulatory activity impacting defined contribution plans, and provided advice for plan sponsors for the near term.

In legal developments, Mercer noted there was action on 43 defined contribution-related cases during the first quarter, including 14 settlements for a total of $55.3 million, with individual settlements ranging from $200,000 to $15 million. Most cases continue to revolve around fees and investments, according to Rhonda Berg, senior defined contribution consultant: Eight cases target 403(b)/not-for-profit plans. Four cases targeted plan sponsor operations, a relatively new focus of litigation.

“It’s important to note that there are plan fiduciaries out there that are being targeted and can get sued over the perception that they’ve been mismanaging their plans or maybe even questionable operational practices,” said Berg. Examples of those cases include plan sponsors ignoring participant direction, limiting investment trades, ignoring participant distribution requests and not administering plans.

While litigation in this area is not widespread, “we think it’s important to note that looking at operations and making sure you’re shoring up your practices there periodically is a good area of focus,” said Berg.

In the legislative sphere, the debt limit debate had been hanging over Congress for several weeks. Although it doesn’t particularly pertain to DC plans, it will become increasingly important for the retirement ecosystem to pay attention to policy in this area, said Geoff Manville, partner and government relations leader for Mercer’s Law and Policy Group.

“The growing focus on the deficit will likely bring a return of proposals for things like more notification of retirement savings and limits on the preferential tax treatment of savings, especially for high earners,” Manville said. ”Anything that raises revenue is going to get a long look in this fiscal environment.”

Primary focus: SECURE 2.0

Beyond that, the primary focus for legislators over the near term will be to follow up on SECURE 2.0 items that need technical corrections, he said. One item of high interest is a provision that would allow 403(b) plans to invest in collective investment trusts. A bill addressing this issue was recently forwarded to the full House for consideration.

Related:  The DOL’s 2023 agenda: A new fiduciary rule and SECURE 2.0 guidance

Brian Kearney, a principal in Mercer’s Law and Policy Group, said SECURE 2.0 guidance will likely be sub-regulatory – possibly in the form of IRS notices – and is likely to be driven by effective dates. Other SECURE 2.0 guidance is needed on relaxing rules for lifetime income in DC plans and allowing DC plans to use credit performance benchmarks for target date funds. In addition, clarification on some SECURE 1.0 provisions related to Roth mandates still need attention, said Kearney.

Other topics gaining attention are rules around ESG and qualified professional asset managers (QPAMs), possible new cybersecurity guidance, and a proposed Hard Stop rule that would prevent investment transactions from being processed after 4 p.m., which could be problematic for retirement plans that often bundle transactions and send them to mutual funds after 4 p.m. for processing at that day’s price.

“This rule could basically blow up the way a lot of recordkeeping and administration is done in the DC plan space,” said Manville.

Kearney pointed to a recent IRS snapshot on plan loan offsets. He noted that snapshots are summaries of discrete tax law issues affecting retirement plans that the IRS posts on its website. Although they might not seem significant, “they’re actually training material for IRS auditors,” said Kearney. “So they give us insight into the types of issues that auditors are looking at currently, and plan loans are always on that list. But this new snapshot focuses on plan loan offsets and in particular, qualified plan loan offsets which are a creation of SECURE 1.0.”

In response to recent economic challenges, Kelly Henson, U.S. defined contribution investment strategy leader, said plan sponsors might want to consider adding an inflation-sensitive investment option like a diversified real asset fund. Plan sponsors also should evaluate budgeting and debt consolidation tools that may have been added to plans over the past couple of years, and think about what provisions of SECURE 2.0 might be most beneficial for their participant base, specifically in relation to debt, emergency savings and matching structures.

Henson encouraged plan sponsors to revisit participant education, noting that its recent survey of plan participants found confusion about ESG funds and low knowledge levels about target date funds.

“Dust off some old education maybe that’s been used and revisit it with your participants,” said Henson.

Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel.