Tax Monitor

TAKE AWAYS FROM A RECENTLY FILED LAWSUIT AGAINST A 401(k) POOLED PLAN TRUSTEE

June 23, 2020

By: Robert G. Tweel

A recent lawsuit filed in Rhode Island against a Trustee demonstrates the issues faced by plan Administrators in responding to extraordinary circumstances. Our goal is to arm you with the best defense possible when similar issues arise in your plan Administration.

The Rhode Island Lawsuit

Plaintiffs filed a lawsuit in response to an Administrator adopting an alternate valuation date in response to the market decline participated by COVID-19 in March. The plaintiffs’ complaint alleges the employer did not keep terminated employees informed accurately about what the plan could do, claiming that the employer told them in 2019 that the Plan could not perform an interim valuation in response to a request from the terminated employees. The complaint then alleges that the Administrator instituted an interim valuation in response to COVID-19, denying the plaintiffs’ the value as of December 31, 2019. The complaint fails to address whether the special valuation date was necessary. Taking the allegations at face value, plaintiffs have a difficult hill to climb in proving that an interim valuation date was not warranted given the March market decline and the extraordinary circumstances facing most employers at that time. Interestingly, the plaintiffs could have withdrawn their money under the normal operating rules of the plan based upon a December 31, 2018 value, however, they opted to remain in the plan and chose to continue investing in the market during this period (note there will be an argument as to whether the Trustee accurately informed them of their rights). Tough decisions, by a Trustee and Administrator, such as an interim valuation date, a plan investment line-up, or another choice that may lead to poor performance, can spur lawsuits by disgruntled individuals regardless of what that decision may be.

Let’s not overreact to one complaint. The goal of every Trustee must be informed decision making, so let’s review how that happens.

How Did We Get Here?

The recent March market drop due to the COVID-19 crisis represents an abnormal event obligating Administrators to review their plan as failure to conduct an analysis as to whether an interim valuation date was necessary would not be fulfilling their duty to protect and preserve the rights of all participants in the plan. Note, the market decline did not require the Administrator to adopt an interim valuation date, but Administrators did need to determine whether the circumstances surrounding the plan required them to implement one especially if participants requesting withdraws would be at the cost of the value of assets of those remaining in the plan.

The Standard

The Administrator of the qualified plan should maintain a consistent approach to the timing of valuations to avoid any argument of manipulation - in favor or against - the rights of any participant since valuation dates can create timing issues regarding distributions of participants’ plans and growth in plan assets credited to their accounts. To control costs, Retirement Plans with pooled assets often only have one valuation date for plan assets, typically December 31. For smaller employers, the issue of long-term vested employees leaving does not occur regularly and the valuation issue is minimal. In larger employers, they often have several valuation dates throughout the year (i.e. twice a year or once a quarter) to alleviate this distribution issue.

The Required Analysis

For most years, a single valuation date will work if it is consistently applied. However, the Trustee and Administrator are charged with the duty to protect and preserve the rights and benefits of all participants of the plan, i.e. both those remaining and those receiving distributions. In carrying out this duty, the Administrator may deem necessary and appropriate a special valuation date to compute the amount of the kind of benefits payable to beneficiaries of the retirement plan as of a specific date other than the annual valuation date to protect all participants benefits under the plan in special circumstances or situations.

Trustees and Administrators must make decisions regarding the best interests of all participants. Most pooled plans made the decision to use a special valuation date following the March market decline. Employers have used pooled plans in their qualified plan for a variety of reasons. In April, we discussed pooled plans and valuation dates, see 401k Plans with Pooled Assets – We Can Help Protect Your Clients here. Trustees and Administrators must review the entire plan, and then taking all aspects of the plan into account, evaluate options. The final decisions should be designed to create positive and competent change and not just change.

For Financial Advisors, Regulation Best Interest Will Complicate This Analysis

For financial advisers, plan analysis will become more complicated when Regulation Best Interest becomes effective, and the financial adviser may have a fiduciary obligation to advise the employer against the advisor’s own interest. You may want to review our April article here in which we discuss that a recordkeeper platform may represent a savings to plan participants without additional cost and by providing individual investment options to the participants. While we realize that some plans may be better served as pooled plans and some as recordkeeper platforms, this is an example of when financial advisers will need to make certain and keep plan fiduciaries informed in this regard so that the plan fiduciaries can make the decision that is in the best interest of all plan participants.

Whether you are a Trustee, an Administrator, or a financial advisor, Jackson Kelly PLLC is here to answer your questions and guide you through the proper analysis.