So now without further delay, let's begin today's web seminar, once again, "Defined Contribution Plan Perspectives: 2022 Update on Regulation and Litigation." It's my pleasure to introduce your moderator for today, and that is Christopher Dall, Senior Product Leader with PNC Institutional Asset Management. And with that, Chris, you have the floor.

Christopher Dall:

Thank you, Greg. Hello and welcome, everyone. My name is Chris Dall. I lead the Defined Contribution Retirement business at PNC. I'll be moderating today's discussion. As you know, at PNC we're committed to bringing our valued clients timely and insightful information that you can use to inform the decisions you make for your organization's retirement plan. With this in mind, we're happy that you joined us for another webinar in our series, "Defined Contribution Plan Perspectives." Today's update is on regulation and legislation, and we're very excited to have two fantastic speakers from Morgan Lewis joining us again. 

Morgan Lewis is one of the largest employee benefit practices in the country. John and Claire, thank you both for being here today. John and Claire are going to speak about several hot topics in the retirement industry. Their presentation will go about 40 minutes, and after that we'll have time for some Q&A. So please, if you have any questions, type them in the Chat. We'll be collecting them, and any that we don't get to today we will follow up with you after. With that, I'll hand it off to John.

John Ferreira:

Okay, Chris, thank you. As we call this "Navigating the Next," so we're going to do a 2022 update of regulation and litigation, and that's my colleague, Claire, and I. Here we are, looking good. I want to just briefly talk about what we're going to discuss today and then I'll turn it over to Claire to get started.

So we're going to discuss the upcoming lifetime income disclosure regulations that go into effect later this year. We're going to talk about cyber security, which is one that the Department of Labor is very focused on these days. We're going to talk about missing participants, which continues to be a real focus of the Department of Labor in dealing with qualified plans including defined contribution plans. We'll talk about some litigation trends involving 401(k) plans, the guidance the Department of Labor put out on what's called ESG, and finally, we'll discuss some potential legislation.

So with that, I'm going to turn it over to Claire to get started on lifetime income disclosure.

Claire Bouffard: 

Thanks, John. Starting here with the key takeaway, what should be done with respect to the lifetime income disclosure? This is a good time for you to pick up the phone or send an email to your recordkeeper or whoever else prepares your benefit statement and make sure that they are on track and ready to comply with these new rules.

So taking a step back, what are the lifetime disclosure rules? The SECURE Act, which was put in place in 2019, required benefit statements to include, at least once a year, an estimate of monthly income in different specific forms. So one form is the single life annuity, and the other is the qualified joint survivor annuity. And just as background, this was to address Congress's concern that people really aren't saving enough for their retirement, so they wanted people to have a better understanding of, "If I took my 401(k) account balance and I converted it into an annuity and had to start taking payments from that each year, what is that going to look like when I actually retire? And what am I actually going to be seeing on a year-over-year basis?"

So the SECURE Act put that requirement in place, but it didn't really explain exactly how that should be done. There's a lot that goes into figuring out what that annuity stream would look like, what kind of actuarial assumptions were going to be used, et cetera. And so the SECURE Act instructed the Department of Labor to put out regulations about how this should be done. So the Department of Labor issued these final rules, and helpfully, they also issued model language that explains exactly how these lifetime income streams are calculated and what assumptions are used.

So there was a lot of concern when the Act was put in place that if these kind of disclosures were provided, there could be some kind of liability to plan sponsors like you or plan administrators for putting things out that might confuse participants. So if the DOL's model language is used, the SECURE Act provided essentially relief from fiduciary liability if the model language is used. So a lot of people may end up using that model language as part of their disclosures.

The deadline to comply with this is the last calendar quarter ending within 12 months of the September 18, 2021, effective date of the regulation. So that means for most plans, that will be the statement that's delivered in July 2022. So we are coming up now on that deadline pretty closely.

I did want to note although it's just a little bit less common, that that's the deadline for plans in which participants can direct their investments. If you had a plan where participants weren't allowed to direct their own investments, where they were selected by you, the fiduciary, then that deadline would be a little bit different just because they aren't subject to that quarterly benefit statement requirement. They usually send benefit statements on an annual basis.

So as I said from the outset, this is something where you want to reach out to your service provider who provides benefit statements, make sure that they're on track to deliver that first benefit statement within the time that's required or within that last quarter that's going to be delivered in July 2022, and just see what they're doing and whether they're using the Department of Labor model language.

John Ferreira:   

Claire, let me just jump in for one second. One of the other things I think that's going to result from all this is that people are going to see that disclosure, they're not really going to understand what it means, and they're going to have a lot of questions. So the other thing I think you need to do is talk to your recordkeeper, whoever helps you with plan administration or consulting, to discuss how you're going to follow up with your participants when they invariably have questions about, "What does this disclosure mean? It doesn't seem like this is very much money. What should I be doing differently?" I think that this is going to really be a conversation starter in many cases. So it would be a good idea to be prepared for those conversations and to figure out who is going to communicate with your participants and what kind of information they'll be providing.

Claire Bouffard: 

Definitely. Thanks, John, yes. This disclosure assumes that things like they're age 67, it's an immediate annuity that starts right away, it doesn't account for the fact that they may not be 67. They may be 35 years old and they're going to continue to save for years and years, so the prediction based on what their current account balance is may look a little weaker than what they might expect.

So our next topic, cyber security. So starting with why do we care about cyber security? In recent years, and particularly, I think, during the COVID pandemic times, we've seen a big uptick in retirement plans being targeted by thieves and bad actors. And there have been lawsuits that have been brought against plan sponsors and administrators like you or service providers like recordkeepers, where the plan had been hacked and somebody had gathered access to somebody's account and drained it. So in these cases, we're looking at key issues, which is getting into the, "What do we do about this?"

So cyber security is really only as strong as its weakest link, and there are a lot of actors that are involved here. So there's you, it's the plan sponsor. You have access to employee data and plan data. There are your service providers who have access to employee data. And then there are your employees as well. And if your employees aren't following strong cyber security practices, sometimes people like thieves may find a back door in through them rather than through service providers or through you. So the goal is to take control of what you can, create a prudent process. We're never going to have something that is 1,000% impenetrable. We can only do the best that we can and create a process that we think is prudent and that is reasonably trying to secure and safeguard the participant data. And then also, when there is an incident where there is a cyber security breach, that we have a good process in place to respond to that breach and that we follow those processes in all circumstances.

So with that in mind, cases like this will get, with the participant data hacked through, a planned source to, or through some type of unrelated source. Did the participant leave their 401(k) account PIN on a little notepad that sits next to their computer and somebody found that and then went and drained their account? That's obviously a different story from there was some sort of vulnerability on the employer or vendor side that thieves were able to exploit.

So along with that increased interest in cyber security, the Department of Labor has for some time been saying that they're very interested in cyber security and view that as part of your, the fiduciary's, responsibility to create a prudent process to try to mitigate or avoid cyber security incidents if and when they happen.

But for a long time, we hadn't seen any guidance about exactly what that meant. So recently in 2021, the Department of Labor put out three pieces of guidance. None of them are--they're sub-regulatory guidance, so they're not regulations. They don't have quite that same force. But they do tell us something about what the Department of Labor is thinking and what they might expect to see, which is very useful because we now know that the Department of Labor is sending out requests regarding cyber security in new and outstanding audits to focus on these issues.

So here are the three pieces of Department of Labor guidance. So the first one is tips for hiring a service provider with strong cyber security practices. So this is helpful, obviously, of course, if you're hiring a service provider. You'd look at--it has a list of the types of questions that you would want to ask, the types of information you would want to gather from your various candidates when you're trying to hire this service provider, and the things that you would evaluate. But it's also helpful with your existing service provider relationships to take a look and see. And it's helpful for your internal practices as well. As I said, this is sort of a team effort in cyber security, so there are things that you may have to do with your contracting department or your IT department to see what procedures are in place on that side as well as the vendor side.

And then the second is the cyber security program best practices. Again, this is focused on the service provider/employer side, looking to see what kinds of things that you, plan fiduciaries, can do to evaluate the various security procedures.

And then the third is online security tips, and this actually isn't directed, really, to service providers or plan sponsors or employers at all. It's really directed to participants and beneficiaries. So the real value of this might be that it's something that you could distribute potentially to your participants and beneficiaries to encourage them to do what they can to protect their own information as well.

So these don't require any specific steps. They tell you, especially the first two, what you should do, but they don't say that you have to do anything specifically. But the concern is always that since the DOL has told us what we should do, if we were on audit, the DOL might treat these as all mandatory steps rather than things that might be considered as part of a prudent process.

So these are the tips for hiring a service provider, strong cyber security practices. So again, this is a "should." I'm not going to read out the entire list, but this is the list of different things that were done. Obviously, in a holistic approach, this is a lot of information and a lot of it is going to be very technical information. So having somebody from your organization's IT department or privacy department might be very helpful to evaluate all of these considerations. And you may already have something in place where somebody from that department would look at any vendor contract and try to evaluate those things already, so trying to leverage what your organization already has in place would be very important.

So these are the quotations from cyber security best practices. And again, I don't want to read all of these out, but a lot of these, I think the overall takeaway from this is that unlike just the hiring tips, this is going to be something that you may get a lot more information over time that you continue to need to evaluate. So making sure that you understand your service providers are reporting breaches to you and are reporting to you what their responses are, giving you updates when their processes or procedures change so that you know what those new procedures are and that you can confirm that they continue to meet the cyber security best practices is very important.

And then the third, as I mentioned, the online security test for participants and beneficiaries. Again, this might be something you might want to just send out to your participants and beneficiaries. And in addition to that, you might consider adding a paragraph to your summary plan description or similar document just to tell participants it's important to keep your password secure. If you have dual-factor authentication, offering them a chance to opt in there, as that can significantly reduce the risk of theft.

So again, it's a list of things plan administrators might consider, so you. I think I've covered all these, but just reaching out to your service providers and asking them questions using those cyber security best practices and tips for hiring a service provider as a guide. They give you a list, essentially. Enlisting the help of internal IT or anybody else you have in your organization that already has the subject matter expertise here. Adopting a cyber security policy and including enhanced cyber security provisions in your service agreements when they're negotiated.

So moving on to our third topic here, DOL guidance regarding missing participants. This has a similar history to cyber security in that for a long time, the DOL has been very interested in this. They've been doing audits in this space for the past almost 7 years now. And they are very concerned with fiduciaries having a prudent process to locate missing participants, and participants who have uncashed checks is a secondary interest here.

So there was no real guidance for a long time until 2021, when the Department of Labor put out three pieces of guidance as well. So the missing participant best practices, which is just pension plans, but it also applies to 401(k) plans, the compliance assistance relief, and here really being that this has some things that you all could consider if it's not sufficient. And the field assistance bulletin, which is really only relevant in the context of 401(k) plans that are terminated. It says if you follow the PBGC's missing participant program, that they won't enforce against fiduciaries for doing that as long as the search steps before using the missing participant program have been correctly followed.

So just taking a little bit closer look at the missing participant best practices for pension plans, again, this isn't something that mandates the following of particular steps. It just provides examples of different search procedures that participants might follow. It's also very clear that it also applies in the context of uncashed checks as well as somebody who's just completely missing and you've never been able to find them. It also helpfully notes that fiduciaries can consider the size of a participant's account balance as well as the search costs and that not every step is required.

So some of the steps that are in there that sometimes give us some degree of concern are things like using social media. That produces a challenge, potentially, because it could provide a risk and a defect.

So just a quick update because a lot of us have been working with these missing participant issues for some time, the DOL continues its audit focus on missing participants. And even though the initial audits were focused on very large pension plans, that's kind of gone down in size to smaller pension plans and even bled over into the 401(k) plans. And also missing participants continue to create administrative issues for plans in the context of corrections and plan terminations especially.

And so with that, I will hand things over to John to talk about 401(k) litigation trends.

John Ferreira:      

Okay. Thank you, Claire. So anyone who is an administrator or a fiduciary of a 401(k) plan, their worst nightmare is to get served with a class action complaint. And that nightmare has visited many, many, many, many 401(k) plan fiduciaries and plan sponsors. This trend started about 10 years ago, 10 to 12 years ago. A particular law firm in the Midwest really started this trend, targeting very large plans. But in the years since then, other law firms have recognized this as a lucrative kind of line of business and have begun bringing their own kind of copycat lawsuits. The lawsuits have moved what we might call down-market to maybe smaller or midsized plans, and the number is just exploding. 2020 was a huge peak in these kinds of cases. But believe it or not, after a slowdown in 2021--a slight slowdown--we're seeing the pace pick up to the same pace in 2022. And as I'll talk about in a little bit, there was a Supreme Court case decided last month that we thought would potentially help slow down this trend, but it doesn't look like it's going to help at all.

So as I said, the early cases really targeted large plans, but they've begun to move to smaller plans. The focus of these cases is to challenge the decisions made by the plan fiduciaries, the company-appointed plan fiduciaries, on things like selection of the investment funds made available under the plans--whether those funds are going to perform well as investments, whether they have expense ratios that are too high, and in particular, whether, for example, there are lower-cost share classes available in those same funds and whether the recordkeeping fees, which invariably get passed through to participants, are too high.

There's really not much that I could tell you to prevent yourself from being the target of one of these lawsuits other than to be vigilant, to have a good and prudent process for making the kinds of decisions I just mentioned so that you can defend yourself if you become the target of one of these lawsuits. If you have good, prudent practices in place and you follow those practices and you document that you're following those practices so that if we have to defend you in a lawsuit, we can produce evidence that you've done the right things--those are the best defenses that you can come up with. So next.

At first these kind of complaints were sort of scatter shot. They made very general allegations. The plaintiffs' lawyers were kind of fumbling for what sort of claims they could bring. As the years have gone by and many, many courts have decided these cases, the lawyers have refined their attacks, and they're, for example, very much, in many cases, focused in on specific bad actively managed funds, particularly funds that may be related to one of the plan advisers or a fund that doesn't have much of a track record. And if that fund for any reason is underperforming its benchmarks or a passive fund in the same type, that is a target for plaintiffs.

As I said earlier, one of the big targets is where your plan started out relatively small but it's growing as more and more money goes into it. Your funds, your investment funds, might get to a size where you can go into what's called a lower-class share class--maybe from a retail class to an institutional--and basically offer the same fund to your participants but for a lower price. If you don't take advantage of that opportunity and your participants continue to be charged a higher fee even though you could potentially get them into a lower share class, that's kind of low-hanging fruit. That's easy pickings for a plaintiff's lawyer.

Other things that they're alleging, particularly in larger plans, are that you may get to the size where you don't even need to use mutual funds anymore. You can hire a manager, an investment manager, to manage your portfolio or get a bank collective fund, which would lower your fees even further.

And then there are other challenges. For example, some plan sponsors got very creative in the way they set up custom target date funds, for example, using things like private equity and hedge funds as part of the investment, and those ended up getting challenged when they didn't perform that well; or using a managed account product as your qualified default investment instead of a mutual fund, like a target date fund. And as I said, recordkeeping fees are always being challenged. And a plaintiff's lawyers will invariably, whatever you're paying for recordkeeping, claim that you could be paying $10, $20, $30 per participant per year less than you are and that the reason you're paying too much is that you're just asleep at the switch.

Now, late last year we did see a trend--let me back up a step. The key in a case like this if you get sued is to try to get the case thrown out at what we call the motion-to-dismiss stage. That's where the plaintiffs file what's called a complaint, where they list their challenges or their claims, and then the defense files a motion that basically says, "Even if you believe everything that they said is true, their claims are legally insufficient, and the case should just be thrown out before there's any further proceedings."

That's the gold standard if you're defending a case like this, because if you can't get the case thrown out at that stage, it can become pretty expensive to defend after that because you get into what's called the discovery phase, which is where they can demand to look at all your financial--your records regarding the plan, financial records, minutes of meetings. They can actually take what are called depositions. That means they can get the people in the company who manage the plan and make them answer questions under oath. That can get very expensive. It's been very, very difficult in many cases to get these cases thrown out at the motion-to-dismiss stage, but toward the end of last year, we saw a trend where a number of courts seem more willing to do that, to throw the case out at the motion-to-dismiss stage. So I think that's a good development although, again, motions to dismiss are still denied in probably two-thirds to three-quarters of these cases.

The big development in this area very recently was that a case was brought before the Supreme Court of the United States. It didn't involve a 401(k) plan, but something similar. Colleges and universities often have what are called 403(b) plans, different part of the Tax Code because these are tax-exempt entities, but they're very similar in that they have investment funds that people can defer and then put their money into these funds, and they have a recordkeeper, so they have to be charged recordkeeper fees.

And in this particular case, a challenge was brought against Northwestern University--actually, two of its 403(b) plans--with the kind of allegations I mentioned: the funds weren't performing as well, the fees were too high, they were in overly expensive share classes, the recordkeeping fees were too high. Northwestern actually won that case at the motion-to-dismiss stage, and that dismissal was upheld by the 7th Circuit US Court of Appeals. The plaintiffs appealed the case to the Supreme Court. We were all kind of hoping the Supreme Court would recognize this flood of litigation and perhaps lay down some ground rules to make it harder for these kinds of cases to get past a motion to dismiss.

Sadly and unfortunately, the Court fastened on one thing that the 7th Circuit had said in its opinion, which was basically like a straw man. It really wasn't all that critical. But the Supreme Court fastened on it and said, "It seems to us this was at least part of why they decided the case the way they did, and we disagree with it, so we're going to send it back to the 7th Circuit." And the thing they fastened on was that the 7th Circuit seemed to say that even if you have a fund or two that's not performing well or maybe has too high a fee, as long as you have lots of other funds on the lineup that are better, cheaper, then the participants could pick those funds instead, and so let the company and its fiduciaries off the hook.

That's actually not, frankly, an argument that we generally rely on when we're defending these cases, but the Court just said, "Well, we think that was what was behind the 7th Circuit's decision, at least in part. We don't think that's a correct view of the law," so it vacated the decision and sent it back down. No real guidance from the Court on whether or not there are other things that have to be alleged to get past a motion to dismiss. The only thing we can hope is that the 7th Circuit will take the case back, will maybe dismiss again, using other things to rely on, and that may go back to the Supreme Court and give the Court more of an opportunity to help the defense in these kind of cases.

So one thing that's clear, and I say this at the end of this slide, unfortunately, Hughes is not going to discourage, and may actually encourage, the filing of lawsuits. Again, a close read of it will say that it was a very narrow decision on a very narrow point of law, but I've already read comments by plaintiffs' lawyers who have said, "The Supreme Court thinks these cases should all get past a motion to dismiss. The Supreme Court endorses these lawsuits," and that's just going to make even more and more lawyers want to get into this line of business, unfortunately. So we'll just have to wait for further developments.

And I'll make just one more point on these cases. One of the things we've been seeing, and perhaps you've been seeing, is that insurance companies that sell insurance to cover the liabilities of plan fiduciaries, ERISA plan fiduciaries, and many of you may have that kind of insurance, have become much more vigilant because of all these lawsuits in both raising premiums for 401(k) plan coverage, raising what they call the retention amounts, basically like the deductible, how much you have to pay to defend a lawsuit before their insurance will kick in. And they're also increasing their diligence, so they may well come and ask you very pointed questions about who's on your committee, how often do you meet, do you have a consultant, investment adviser? What kind of reports and information do you get from them? Do you follow their recommendations? Those are the kind of questions that you're potentially going to get the next time you're up for renewal.

Okay, next I'll talk about ESG. ESG--environmental, social, and basically corporate governance factors. In some companies, in some industries, some kinds of companies, there may be pressure from employees who say, "I would like our 401(k) plan to provide me an investment choice or choices that are socially responsible, that meet my concerns about things like the environment." The tricky thing about that, of course, is that when you're one of the folks responsible for picking funds, your basic responsibility is to pick funds that are going to perform well, funds that are going to return a good amount on the investments people pick. And so there's been for years this kind of jockeying back and forth between these two poles. "Well, can I do something that's socially responsible, but how do I do that without sacrificing return?"

And the Department of Labor in various administrations has either been much more lukewarm or cooler on using ESG factors or more encouraging. And you'll be shocked to know that it tends to be the Republican administrations that are not in favor and the Democratic administrations that are. And so there's been this kind of ping-pong back and forth, really since the Bush Administration.

So the Trump Administration's Department of Labor had put out guidance that was discouraging, basically really doubling down on the notion that you shouldn't really be focusing on what they call "nonfinancial factors" in picking investments. Your focus really only ought to be on things that will affect the performance of the funds in the future. Now, if you think that there's some kind of environmental or social factor that will actually make a fund perform better than other funds, okay, fine. But you shouldn't be using the social factors as a thumb on the scale. And that guidance really discouraged a lot of plan sponsors and fiduciaries from thinking about adding socially responsible [inaudible].

The Biden Administration took office, there was turnover at the Department of Labor and, not surprisingly, the Biden Administration Department of Labor basically withdrew that guidance and instead issued its own proposed rule that basically signals a much more permissive regulatory environment for fiduciaries in considering ESG factors. And while it didn't say, "Oh, you can ignore financial performance as a factor"--that's still primary--it's tried to balance between that pole and the social pole in a much more favorable way to using socially responsible funds.

So what the Department of Labor in its most recent guidance basically said is that ESG factors that could be material to risk and return may be considered, and in some cases ought to be considered. And particularly climate change was one that the guidance really focused on, the idea being it might well be prudent to think in terms of how climate change and the effects of it might affect companies in certain industries, for example, like the petrochemical industry. So that's something, again, the Department of Labor seems to now be much more focused.

And what was traditional and as these things went back and forth is what they call the "tiebreaker test." If you find two funds that are financially, or as an investment, equal, but one of them is socially responsible, you can use that as a tiebreaker. Now, that's very hard to do, but the new guidance gets away from that notion that they have to be equal and is more of a spectrum. As long as the funds are comparable in performance, then you can take the social factors into account.

The guidance that's most recent also undid what the Trump Administration guidance said and actually says, "If you want to do it, you can actually have a qualified default investment, like a target date fund suite, that uses ESG factors." The Trump Administration guidance said you just can't do that. And there was some proxy voting guidance I won't get into, because that's really more relevant in large pension plans.

Despite all of that, now again there's a more friendly environment for this, it does leave, I think, plan fiduciaries still in somewhat of a quandary, particularly because if there's another regime change in 2024 the pendulum might swing back in the other direction. And also, there are a lot of unanswered questions that result from all of this back-and-forth, like how do fiduciaries implement these standards? Are the new standards actually any easier to implement than the old ones? How do you evaluate the ESG characteristics of various products and services? Does this new tiebreaker test really give more flexibility? And as I said, what if there's a new Republican administration in January 2025?

Again, I think a lot of this comes back to the fundamental question of how much pressure does your company feel to respond to participant requests to provide socially responsible funds? And I should mention one thing that I think a number of my clients have found, and that is that if you have a brokerage window as part of your plan--in other words, a self-directed brokerage account where your participants can go in and not just pick what's on your lineup, but can invest in any other mutual fund, for example--that could be a good sort of to take the pressure off. It puts you in a position where you say, "Well, we're not all that comfortable deciding that we think a socially responsible fund belongs on the lineup, but if you feel that way, our brokerage window is available for you to go in and, for example, pick a socially responsible US stock fund if you feel you want to do that."

So there's really no immediate action required. But as I said, the proposed rule is generally more permissive for fiduciaries. But if you're currently using ESG factors, you may want to think about how this affects your decision-making processes.

And now let me wrap up with what's always a dangerous topic, particularly in an election year, and that's potential new legislation. There's been bipartisan support for a number of years for some particular types of retirement plan legislation, generally speaking, to further encourage employees to save for their own retirement, to remove barriers from that kind of saving, and maybe even to be a little bit proactive in pushing people to save for retirement who maybe are not doing that.

It's interesting, because nothing in Washington these days--almost nothing--is bipartisan, but this generally is. It's not a topic where right and left tend to disagree. So this actually, even in a very divisive era, may be one where there could be bipartisan legislation. And a few years ago, Congress passed what was called the SECURE Act, which made some changes. I think that the sponsors of the SECURE Act and others in Congress didn't really feel like it went far enough, and so there are other proposals now in Congress that are sort of what we call SECURE 2.0 to do more to encourage savings, to safeguard employees, to encourage them to save.

I'll just quickly tick down through these, because these are all kicking around in Congress. For example, requiring that companies automatically enroll participants, which many, many do already, at least 3% of pay and then escalate them each year up another percent until you get to 10%. And they can always opt out.

There's a new rule that allows long-time part-time employees to become eligible to participate in these plans after 3 years of having 500 or more hours of service. There's a proposal to reduce that to 2 years rather than 3. A proposal to allow companies more flexibility in putting matching contributions in for participants who cannot afford to save because they're paying off their student loans. To allow some incentives, like gift cards, to get people to start participating in 401(k) plans. That's generally prohibited under current law. Increased catch-up limits for older participants, increasing the required beginning date, meaning the date on which people have to start taking out their money to 74 or 75. The SECURE Act increased it to 72. Exempting certain accounts under certain amounts to any required minimum distributions. And then reducing the excise tax on investment distributions, because that's often something that's overlooked.

And then there are a lot more. I won't go over these all in detail. Suffice to say that in general, the theme is, "We want to encourage and make it easier for people to save for retirement and to protect those savings and make sure people understand what their plan is providing to them." And again, the lifetime income disclosure requirement was in the SECURE Act. There will be some enhanced disclosures if this new legislation gets passed.

So how likely is anything to pass? I wish I had a crystal ball. There's a lot of things on Congress's plate this year. There's potential that Build Back Better will come back. There's a Supreme Court nomination that's going to have to be considered. There are hearings on various things Congress has to do every single year, like pass a budget. And then, of course, this is an election year, so all of your Congressmen and many of your Senators are going to want to get out of Washington as early as they can in late summer so they can campaign. So that kind of truncates the year.

So could anything pass? On the one hand, all of that, I would say maybe not. On the other hand, as I said, this is bipartisan legislation. I'm sure that particularly the Congressmen and Senators who are up for reelection want something to run on or to be able to say, "I was a cosponsor of this bill or that bill." Two of the key people in Congress, and that's Senator Portman and Congressman Brady, who have traditionally been leaders in this area, are going to be leaving Congress. And so my suspicion is that one of the things they may want to do on their way out is get one final, really good piece of legislation passed that they can put their name to.

So my bold prediction is that there's slightly better than a 50/50 chance something's going to happen this year. I know that's not a very bold prediction, but that's kind of where I think. I think I'm leaning in favor of something passing this year if other things don't happen in Congress to derail the process.

That's really all we have as our presentation, so I think now we're just about at the time when we could start looking for questions, if there were any questions put into the Chat. 

Christopher Dall: 

Hey, John, so we've got a couple of questions through the Chat, and I'd like to remind everyone the Q&A panel on your screen, please continue to submit questions, and we'll ask them in the order they were received. Starting with 401(k) litigation, "Given that 401(k) litigation plaintiffs are often ex-employees, are there any suggested methods to incentivize ex-employees to roll over their plans to their new employer?"

John Ferreira:  

Oh, well, that's an interesting question. By the way, you're right that in many cases, the named plaintiffs--and this is one of the keys--if you're going to bring a class action case and you're a law firm, you may identify a big company and you may know their 401(k) plan because you've pulled their 500s off the Department of Labor website, you think may have some vulnerabilities. They're paying too much for recordkeeping or they have some overly expensive funds. But you can't bring a lawsuit until you get a plaintiff or maybe a couple of plaintiffs, and they have to be people who are participating in the plan. Current employees occasionally are plaintiffs, but for the most part they don't really want to get in front of suing their employer. So you're right, it's usually former employees.

However, sort of the trend in the opposite direction, and we didn't talk about this, but the Department of Labor has recently made it clear that people outside of 401(k) plans who advise employees about what to do with their money when they leave have to be careful in not overly selling the idea of taking the money out of the plan and putting it in an IRA that they can manage. They instead have to act in the best interest of the participants and give them advice that's disinterested. And unfortunately in many cases, the best thing a participant can do is leave the money in the plan.

Now, you can't penalize people for leaving their money in your plan. Again, the IRS has rules against that. About the only thing that you can do is charge an account fee. Maybe you don't charge that to your active employees, but you can charge it to your former employees, but it has to be reasonable and related to the actual expense of administering their account. And so you may want to think about that. But for the most part, there's really not much you can do to encourage people to take their money out, particularly because that may be the best choice for them. You've carefully curated a lineup of funds that, hopefully, don't have overly expensive fees and are performing well and might be better for them, particularly if they're not retail-class funds, than anything they could get if they took their money and put it in an IRA. So that's why this gets to be kind of tricky.

Christopher Dall: 

Thank you, John. Another question came in on the investments area. "Can you go into more detail on what kind of investments should and should not be a qualified default investment?"

John Ferreira: 

Well, the Department of Labor guidance on this says that there are three permitted types of qualified default investment alternatives. So-called target date funds, which are, I think everyone probably knows, a suite of funds, typically mutual funds, although they can be set up as elective trusts, that start when someone is, let's say, 25, with a mix of investments that's maybe 90% to 95% stocks and 5% or 10% fixed income. And obviously, there are subcategories within each of those. And then as the person moves through their career and gets older, the mix of investments gets more and more conservative until the point where they get to retirement age, and at that point--and again, vendors differ pretty significantly in how much risk they take off the table. But typically, they're down to 20% to 40% equities and the rest in fixed in. So that's a target date suite.

You can also have what's called a balanced fund, and that is just one that maybe 50/50 or 55/45, 60/40 stocks and bonds and just tries to maintain that kind of balance.

And then the third is what are called managed accounts. And those are obviously more costly, but they involve actually having an outside fiduciary, a financial consultant, that works with participants to construct portfolios that are appropriate for them at whatever point they are in their career, taking into account how much they have in their account, what their outside investments are, and so on. So those are really the three permitted qualified default investment alternatives.

For a variety of reasons--I won't get into all the details--but the target date fund suite has become overwhelmingly the choice of most plans. I would say I think the statistics are 80% to 85%. I do think that there are some folks in the industry who have been looking at this issue and saying, "Are target date funds really the best choice in every case? And in particular, as people get closer to retirement age, is it sufficient just to put them in a fund that has a somewhat more conservative mix of investments?" What if their personal situation is, for example, that they weren't able to start saving until much later in their career? Maybe that plus a conservative mix of investments is going to mean that they're going to fall significantly short of their retirement goals. Maybe they need something different than that. I've seen a development in the last couple of years in which a target date suite ends up, after a certain age, not in a particular, again, standard sort of target date fund, but in a managed account product.

There's also, I think, going to be developments over the next few years, and this lifetime income disclosure is going to push in this direction, where you're going to see more and more target date fund-type products where, as you get closer to retirement, what you get invested in is more of a lifetime income guarantee or annuity-type product. Because once you start telling people, "This is how much your account is going to produce as a stream of income when you retire," they're going to wonder what they can do to lock in that stream of income, and an annuity is really the appropriate way to do that. And I think that's another thing that I think will develop in the market and may be driven a bit by these lifetime income disclosures.

Christopher Dall:  

Thank you, John. Staying on the topic of investments, "Is there an expected date that the ESG rule will become final in its current or a modified form?"

John Ferreira:     

Hard to say. I think that the Department of Labor moves at kind of its own speed on various things, but I would expect it to become final some time in the first half of this year. But as I say, even once it becomes final, it's final until--potentially, at least--until the Department of Labor turns over with a new administration. And so the Trump rule was final, and now it's not. So there's that.

Christopher Dall: 

Going back to the lifetime income disclosures, Claire, you mentioned that what's provided today in the disclosures is it assumes they're of a certain age and no additional contributions. "Are there any risks to going beyond what is required in terms of the lifetime income disclosures, such as providing through a recordkeeper a calculator that allows more assumptions to be built into the process?"

Claire Bouffard:     

So you wouldn't have the special fiduciary protection that they provide for these examples, but I think in some ways, as John kind of mentioned as well, it could be helpful to allow them to use their actual information to get what might actually be a clearer and more accurate picture than what would be given by the lifetime income disclosures as far as what their retirement income might look like. They can take into account all kinds of different assumptions that may be a better look at their life, including how long their money's going to be in the account and what their actual age is, what their contribution rate is, et cetera.

Christopher Dall: 

Thank you. Jumping to cyber security, you mentioned encouraging participants to practice good cyber hygiene. "Should cyber security plans and policies be formally documented? And if so, where would be a good place to document them?"

Claire Bouffard:  

So I certainly wouldn't put it in the official plan document. You wouldn't want to have to amend your plan every time you updated your antivirus software or something like that. So it might make more sense to have something that's not a part of the plan document or necessarily even the SPD. It's just something a little bit more like an administrative procedure that you might have in like a separate administrative procedures or policy document, sort of more similar, maybe, to an investment policy or something like that, than the actual plan document itself.

John Ferreira:  

I would say the Department of Labor is really big into policies. They love it when you have written policies, because then they feel like you were thoughtful about what you needed to do. Now, of course, it doesn't help if you have a really nice written policy and you hand it to them when they do an audit, and then they say, "Great. Have you been following this policy?" and you say, "Well, not really. We drafted it and then it just went in somebody's drawer." But I think that if you have a policy and you're following it, that's going to help you a lot if the Department of Labor comes knocking on your door.

And like Claire said, it's just a separate policy document, maybe one on how you handle missing participants and uncashed checks, one on how you handle cyber security. Those would be two kind of good policies to have in writing.

Christopher Dall: 

Staying on that theme of documenting a process, we have a question regarding the investment lineup and how you determine it that came out of the litigation section. "Even if the DOL says it's optional, is it table stakes to have an investment policy statement these days?"

John Ferreira:

Yes, absolutely. And I think that, again, while it's not required, every single DOL audit I've ever been involved with, the DOL has asked for the investment policy statement. They expect to see it. Even if they have told you it's not required, they're happier when you have one. Because again, what it is, is it's evidence that you've been thoughtful about how you manage the investments under the plan, that you're not just sort of making it up as you go along, but that you actually have guidelines that you're following, and that it shows, assuming you're following the policy, that you're doing a thoughtful and appropriate and prudent job. So the IPS will say, "Here is how we select funds. Here's what our watch list standards are. Here are the benchmarks that we use to benchmark various of our investments." It shouldn't be so specific that you're going to trip over it, but it should be robust enough that it's clear that you're thoughtful and you're doing a good job. And your consultants, your investment consultants, really ought to be primarily responsible for helping you put that together, although I would say your lawyers should take a look at it, too.

Christopher Dall:

So with that, I know we're nearing the top of the hour. I just want to say thank you, John and Claire. That was fantastic. Thank you to all of the attendees for joining us. We'd love to continue the discussion, so please reach out to your PNC representative or fill out the Contact Us form to meet with a member of our PNC team. Following the webinar, you'll be redirected to a survey. If you could please give us feedback or even ask additional questions, your feedback will help us to tailor the next webinar to better meet your needs.

So with that, that concludes today's webinar. We really appreciate your time and hope this was beneficial to all of you. Greg, if you could please give the final housekeeping items.


Great, thank you, Chris, and thank you to all of you for joining us today. We hope you found today's webinar useful and informative. As Chris just mentioned, please fill out the post-event survey that will pop up on your screen after the event's conclusion. Your feedback is greatly appreciated, so thank you in advance.

Also keep an eye on your inbox, as our host today will be sending you an email in the next few days with a link to the recording and other helpful resources. So thank you again for attending and have a great day, everyone.

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