Enacted in 1974, ERISA celebrates its 45th birthday this year. A lot has changed in those 45 years. While ERISA has kept up with the changes at time, one area where ERISA has not stayed current is Section 404(b). Here we discuss this section in brief and offer a word of caution to ERISA fiduciaries pursuing global investment strategies.

ERISA Section 404(b) is a sneaky section, stuck between two arguably more prominent sections: Section 404(a), which sets forth the fiduciary duties, and Section 404(c), which helps fiduciaries protect themselves against claims of breach of those duties. But there between them—clocking in at a slim 44 words—is Section 404(b):

Indicia of Ownership of Assets Outside the Jurisdiction of District Courts.—Except as authorized by the Secretary by regulation, no fiduciary may maintain the indicia of ownership of any assets of a plan outside the jurisdiction of the district courts of the United States.

The Basics

Representations and warranties insurance (R&W Insurance) protects a party from financial losses resulting from inaccuracies in the representations and warranties made about a target company or business in connection with certain corporate transactions such as mergers and acquisitions. R&W Insurance policies are made up of both buy-side (most common) and sell-side policies.

In a traditional buy-side R&W Insurance policy, the buyer is the insured and the objective is to provide coverage against financial loss suffered as a result of a breach of the seller’s representations and warranties. The parties’ exposure in the case of a breach of the representations and warranties is limited to a relatively low amount referred to as the retention amount. In most R&W Insurance policies, the retention amount is generally equal to between 1–3% of the enterprise value of the transaction. The R&W Insurance policy protects against any exposure in excess of the retention amount and up to a negotiated limit.

The Internal Revenue Service (IRS) has primary jurisdiction over the qualified status of retirement plans, and this jurisdiction includes examining plans. An IRS agent can notify a plan sponsor at any time that its plan has been selected for audit. A plan sponsor should thus consider a compliance self-review to minimize the pain of audit and ensure that the plan is operating correctly, that its plan documents comport with plan operation, and that plan records are complete and organized before the IRS comes knocking. Please see our recent LawFlash detailing the top 10 issues of IRS focus in its audit of qualified plans. Also, please see our prior LawFlash addressing the top 10 areas of focus in US Department of Labor (DOL) investigations of retirement plans.

If you have questions about IRS or DOL investigations of retirement plans, please reach out to the LawFlash authors or your Morgan Lewis contacts.

The US Department of Labor has been extremely active in recent years as the federal agency investigating compliance with and enforcing the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). These investigations have frequently resulted in findings of fiduciary breach and monetary recoveries for ERISA retirement plans. Please see our recent LawFlash on this topic, and reach out to the LawFlash authors or your Morgan Lewis contacts if you have additional questions.

The Employee Benefits Security Administration (EBSA) at the US Department of Labor (DOL) compiles statistics every year to measure its activities as the agency responsible for investigating and enforcing the fiduciary duties under ERISA. Statistics for the agency’s 2018 fiscal year enforcement activities affirm that EBSA’s enforcement program remains extremely active, with a particular focus on terminated vested participant investigations.

In June 2018, the US Court of Appeals for the Fifth Circuit officially ordered the US Department of Labor (DOL) to vacate the so-called DOL Fiduciary Rule—the name generally used to refer to the 2016 amendment to the definition of fiduciary “investment advice” under ERISA and Internal Revenue Code Section 4975—and its related exemptions. As a result of this order and the DOL’s decision not to appeal, the DOL Fiduciary Rule is regarded as effectively repealed, leaving just the formality of removing it from the Code of Federal Regulations. But the rule continues to influence developments not only in the retirement area, but also beyond.

There are two distinct types of insurance products that ERISA plan fiduciaries should be aware of. We get a lot of questions about these, so we thought a refresher may be in order.

First, there is the insurance product ERISA actually requires. This is the bond required by Section 412 that is intended to protect employee benefit plans from risk of loss due to fraud or dishonesty. This requirement applies to every person who “handles funds or other property” of an employee benefit plan, with certain exceptions. “Handles” is construed broadly and includes not just physical contact with plan funds or property, but also the power to transfer funds or property from a plan to a third party, or the authority to direct disbursements of such funds or property. The US Department of Labor (DOL) has said that a plan investment committee “handles” plan assets if the committee’s investment decisions are final (including, for example, the decision of which investment manager to hire), so each member of such committee should be bonded. On the other hand, fiduciaries who make recommendations that are subject to approval by other fiduciaries do not “handle” plan funds or property, and so on that basis, they would not need to be bonded.

Contributions to individual retirement accounts (IRAs) for a given year are due by the tax return filing deadline for that year, excluding extensions. For most IRA owners, the deadline for making their 2018 IRA contributions is Monday, April 15, 2019. However, for IRA owners who live in Maine or Massachusetts, the deadline is Wednesday, April 17, 2019.

Many participant-directed 401(k) plans these days include a self-directed brokerage window option as a way to supplement the plan’s menu of designated investment options. While the plan’s menu may be limited to 10–25 investment alternatives, depending on the particular plan (for this purpose, counting a target-date fund suite as a single alternative), a brokerage window can provide access to several thousand mutual funds as well as—depending on the particular arrangement—the ability to trade in individual stocks, bonds, options, or other securities.

In recent weeks, there have been a number of reports that the US Department of Labor (DOL) has been taking a more aggressive approach in enforcement actions involving late participant contributions and loan repayments and other errors self-reported by ERISA plans on their Forms 5500. These reports underscore the importance of timely, full correction when a plan discovers such late contributions and loan repayments, and other fiduciary breaches.

Under applicable DOL rules, participant contributions and loan repayments must be remitted to the plan’s trust as soon as the money can reasonably be segregated from the employer’s assets (and no later than 15 days, unless the plan qualifies for a small plan exception). The DOL’s view is that it is a breach of fiduciary duty when the payments are made into the plan’s trust later than that. The delay is treated as an unauthorized loan of plan assets and, therefore, a nonexempt prohibited transaction. The DOL has treated these breaches as an enforcement priority and regularly reviews this issue during its plan investigations (the DOL having primary investigatory authority of ERISA’s fiduciary duty provisions, and a robust investigatory program). The DOL frequently cites ERISA plan fiduciaries for fiduciary breaches due to such late contributions and loan repayments.