Is the DOL Fiduciary Rule the End of Solicitor Arrangements? – Part 2

In my last blog, I discussed why the solicitor structure has grown in popularity and why it will continue in the future but without the same benefits enjoyed in the past. In this blog post, I review how the DOL’s Fiduciary Rule will change the role and structure of the solicitor.

First and foremost, every solicitor will become a fiduciary on April 10, 2017. As a fiduciary, a financial adviser (FA) is subject to an ERISA fiduciary standard. This alone may be sufficient reason for some FAs to exit the industry, but what is more likely to happen is a flood of new fiduciaries will be marketing to retirement investors. Consider that there are approximately 700,000 retirement plans filing a 5500, but this number is dwarfed by the 40+ million homes that hold an IRA. In other words, there are approximately 60 times more IRAs than retirement plans, so it is safe to assume there are more FAs handling IRAs than retirement plans. In short, we will see a drastic increase in the number of fiduciary advisors in the market.

In addition, based on our own internal survey, IRA assets held by a Broker-Dealer (B-D) range between 40 and 80% of B-D total assets. However, many of these FAs know very little about ERISA fiduciary standard of conduct. This lack of knowledge increases B-D litigation risk as tens of thousands of misguided fiduciary missiles seek to secure new engagements or service existing clients. B-Ds will have to establish new training protocols in conjunction with compliance oversight to mitigate this risk. More on training to follow in our next blog.

Keep in mind that many of the FAs that handle IRA assets have historically avoided the retirement plan market place altogether; however, if they want to continue working and building their IRA practice they now have they have no choice but to become familiar with and adopt the ERISA fiduciary standards and obligations into their practice. As a result, we will likely see a drastic increase in FAs and Insurance Agents taking the Series 65, and I would not be surprised to see testing centers unable to accommodate FA’s date requests the longer the FA procrastinates. My advice, order the Series 65 study materials now and take the test ASAP.

After the Series 65 is passed, FAs will have to secure Fiduciary Errors & Omissions (E&O) coverage. Trust me, your competitors that live and breathe ERISA will be sure to tell your clients (their prospects) they should not deal with anyone that does not have Fiduciary E&O. Of course, this is an added cost of doing business that has not been necessary in the past for most FAs. Small B-Ds that have prohibited their registered reps from using the “f” word will find this cost difficult to swallow, whereas many of the larger B-Ds have turned this cost area into a profit center due to their bulk buying power. I suspect between this cost and the technology costs necessary to monitor the FAs business subject to the new DOL Fiduciary rule, many small B-Ds will give consideration to a merger or acquisition.

Once the FA has secured the Series 65, consideration should be given to the FA’s business model. Whether an FA decides to adopt a fee-based business model or continue exclusively in a commission-based, new agreements, contracts, policies, procedures, and website disclosures will need to be created. The cost for ERISA legal counsel to draft these documents after gathering an understanding of the business model will be a new cost for the FA, their B-D and/ RIA. Small independent RIAs will bear the full brunt of this cost whereas much larger organizations may be able to secure these documents as part of normal overhead. Either way, these new documents and disclosures represent more work and cost.

Regarding the business model, an FA currently in a solicitor arrangement will need to update their contract with the client to reflect their fiduciary status. This represents additional work and client education, but, more importantly, it changes the dynamic of the FA’s relationship with the RIA they referred. First, the FA will need to address their responsibility to monitor the RIA. Remember, recommending an RIA to a retirement investor is a fiduciary act. As a fiduciary act you must monitor the RIA to ensure they continue to meet the client’s needs and objectives. So, there is more work and risk to the FA for no additional pay. Second, since the FA is a fiduciary, the recommendation to use an RIA could be challenged as a prohibited transaction. You may recall, a fiduciary cannot use its position to increase its compensation. This is found under 29 C.F.R. 2550.408b-2(e)(1) which states:

“Thus, a fiduciary may not use the authority, control, or responsibility which makes such person a fiduciary to cause a plan to pay an additional fee to such fiduciary(or to a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) to provide a service. Nor may a fiduciary use such authority, control, or responsibility to cause a plan to enter into a transaction involving plan assets whereby such fiduciary (or a person in which such fiduciary has an interest which may affect the exercise of such fiduciary’s best judgment as a fiduciary) will receive consideration from a third party in connection with such transaction.[Emphasis added.]

I suspect this is more of a concern for the FA that provides no service other than a referral, than for the FA that was engaged to provide non-fiduciary services. However, every financial institution will need to consult with their legal counsel to determine the extent to which this issue presents a fiduciary risk.

As you can see there are numerous issues that both the Financial Institution and the FA will need to address. I am sure that some FAs will choose to leave the industry, but it seems hard to fathom a smaller number of marketing RIAs in the future. Those that choose to stay engaged will need to change their business model to align with the new DOL Fiduciary Rule. It will cost more, there will be more work, more risk, and no additional pay at this point. FAs that have never provided an investment review to monitor the investments will need to do so in the future to justify their compensation especially on complex products. Of course, there is plenty of opportunity but even the optimistic FA will need to temper their enthusiasm with a large dose of pragmatism.

As printed in the eMoney Blog.

Education Isn’t a Best Practice It Is A Requirement

Expect to see more articles on the subject of Fiduciary Education in the months to come e.g., (Investment News) and do not be surprised to see the following Department of Labor (DOL) position on training from the preamble quoted in those articles:

In particular, Financial Institutions must ensure that Advisers are provided with information and training to fully understand all investment products being sold, and must similarly ensure that customers are fully advised of the risks.” 

While we await the DOL’s response to many questions, a plain reading of the statement above implies a new fiduciary standard of product expertise, not previously expected of advisers in the past, has been established. Although adviser success has historically been measured by who they know, it now appears that adviser success will be based on what they know especially if fiduciary risk mitigation is an adviser priority.

More specifically, does the adviser fully understand the risk associated with the recommendation and has the adviser fully educated the investor of all risks so s/he can make an informed decision? Furthermore, is the adviser educated on the role a recommendation might fill under an ERISA standard of care? In other words, the adviser not only needs to be educated about the products they recommend but also why the products recommended are prudent and meet the best interest standard of care.

With less than 7 months before April 10, 2017, effective date, product manufacturers are under the gun to provide the necessary product education to their distribution channels. Smart compliance officers will demand documentation to support a claim their adviser has been adequately trained on each product they sell before permitting an adviser to sell that product after April 10, 2017. I also foresee a compliance officer prohibiting any adviser from selling products without documented proof they have been properly trained to mitigate litigation risk. Unfortunately, it is impossible for a product manufacturer to train all the advisers they have agreements with by April 10, 2017, if the education is delivered face to face. To reach all advisers that have or may sell your products you must establish an online Learning Management System (LMS) deliverable.

In other words, training must be web-based, on-demand, and gamified. Training tracks should include multiple modules that are content-rich. Between the education and the test, it should take no more than 15 minutes per module. Upon completing each module and successfully passing the test the adviser should be given a certificate of completion with a compliance officer access to pull reports that track adviser activity. Content must not only cover the product comprehensively, it must also address ERISA nuances especially fiduciary duties. ERISA training should be provided by a law firm since plaintiff attorneys tend to hold training from the peers in higher regard than ERISA laypeople. In short, training provided by an attorney on ERISA statutes, regulations, and judicial decisions is a strategy that maximizes risk mitigation.  However, product modules should be prepared by the product manufacturer to avoid liability for education that cannot be controlled by a party outside of the product manufacturer.

FRA PlanTools and Wagner Law Group have partnered together to provide a low-cost solution that can be provided for free to advisers if structured properly.

To learn more about this solution visit For more information, contact David Witz at 704-564-0482 or

Is the DOL Fiduciary Rule the End of Solicitor Arrangements?

Is the DOL Fiduciary Rule the End of Solicitor Arrangements?

David Witz post on eMoney Advisor

A solicitor arrangement is a common practice among financial advisers (FAs) who want to avoid fiduciary status but still receive compensation in exchange for a referral that results in a sale to a retirement investor. In some instances, the referring FA serves in any number of ongoing non-fiduciary roles such as a communication and/or education specialist, or vendor manager.

The structure has been widely marketed by many registered investment advisors (RIAs) who offer Employee Retirement Income Security Act (ERISA) Section 3(21) investment advisory or Section 3(38) discretionary investment management services to retirement plans through FAs as a distribution channel.

There are several primary reasons this collaborative effort has prospered in the past including:

  1. Fiduciary risk and liability for the FA is avoided.
  2. The referring FA does not need to become an RIA or IAR to receive compensation.
  3. The referring FA does not need to acquire fiduciary E&O.
  4. The referring FA can solicit IRA rollovers from the plan participants without engaging in a prohibited transaction.

Although the July 2012 changes to ERISA Section 408(b)(2) made the solicitor arrangement more complicated, it did not eliminate the structure as an ongoing solution. In fact, the 2012 changes to 408(b)(2) actually became the impetus to accelerate the continued proliferation of the solicitor model. Growth of this model is based on the assumption that an FA can recommend a client or prospect retain the services of an RIA without becoming a fiduciary. The industry has relied on the following section of the Regulation that defines the term “fiduciary”:

A person shall be deemed to be rendering “investment advice” to an employee benefit plan, within the meaning of section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (the Act) and this paragraph, only if…Such person renders advice to the plan as to the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing, or selling securities or other property.  [Emphasis Added] 29 C.F.R. § 2510.3-21(c)(1)(i) (Oct 31, 1975)

Notice the Regulation does not state fiduciary status is tied to “advice to the plan as to the value of an RIA” or a “recommendation as to the advisability of investing with or through an RIA.” The focus of the Regulation is on advice rendered in regards to a “security” not an “RIA”. Of course, this has been debated and even litigated in a case involving investments made with Madoff but the popularity of the solicitor arrangement has continued to grow in reliance on this Regulation. Unfortunately, this approach is on life support with an imminent end in sight.

Effective April 10, 2017, the solicitor arrangement will no longer operate with the same benefits FAs have enjoyed in the past. Instead, any FA that refers an RIA to a retirement plan or IRA investor (i.e., a retirement investor) will become a fiduciary as that term is defined under ERISA. More specifically, any FA that refers an RIA to a retirement investor in exchange for compensation is a fiduciary. Of course, the referring FA’s liability is tied directly to the RIA recommendation not necessarily to the investments recommended or selected by the RIA. This also means the FA has an obligation to monitor the RIA to ensure the RIA continues to execute the investment mandate as promised. Should the FA fail to monitor the RIA, the FA could be liable for investment results should the RIA fail to execute its responsibilities prudently and according to the investment mandate. The liability associated with an FA recommendation is supported by the following wording found in the preamble:

“As amended the Regulation provides that a person renders investment advice with respect to assets of a plan or IRA if, among other things, the person provides, directly to a plan, a plan fiduciary, plan participant or beneficiary, IRA or IRA owner, the following types of advice, for a fee or other compensation, whether direct or indirect…A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services . . .[Emphasis added.] FR 21005 (April 8, 2016)

Bottom line, the new DOL Fiduciary Rule has not prohibited the solicitor structure, but the DOL has made a solicitor a fiduciary under ERISA; and as a fiduciary the solicitor now has more liability and responsibility. What impact this change will have on this popular structure one can only guess, and since I’m not bashful about guessing I will provide you with what my crystal ball suggests could happen to solicitors in the future in Part II of this blog, coming soon.

As printed in eMoney Blog.

Oracle Sued by Schlichter Bogard & Denton After Recent Cases Against Anthem, Reliance Trust, and BB&T

[This blog is approaching its 3rd Birthday this spring and in celebration we have a new logo and have made some much needed updates to the site. All cases in the menu at the top should be current as to whether it is an active or closed case. We have also started using MailChimp to send out emails of posts with the plan to send them out on the day of, rather than the day after, the post happens here. If you have any comments, questions, or inquiries, please feel free to reach out to me at]

As most readers are probably aware, there has been a significant uptick in the number of ERISA fiduciary breach lawsuits filed in the last couple of months. We will be adding these cases to the blog over the next few weeks as we also add our commentary. In today’s post, we will address all of the recent lawsuits filed by Schlichter, Bogard & Denton, the 800 pound Gorilla in this space. The most recent case filed was just last week against Oracle. The case against Anthem has received a lot of attention. But one that has slipped through the cracks a bit is against Reliance Trust and one its clients. This case may the first of its kind on this scale to go after an outsourced fiduciary who is not related to the plan sponsor. Finally, the case against BB&T will be familiar to readers as involving claims of a providers own in-house plan.

Troudt v. Oracle Corp.

Just this past Friday, January 22, 2016, an excessive fee lawsuit was filed against Oracle Corp., a Fortune 100 company based in Redwood City, California. Troudt v. Oracle Corp. was filed in the District of Colorado and alleges that the plan’s fiduciaries allowed excessive recordkeeping fees to be paid to Fidelity. The complaint alleges that Oracle allowed Fidelity to be paid between $68 to $140 per participant rather than a reasonable per head fee of $25. The plan’s participant count increased from 38,000 in 2009 to about 60,000 today. Over that same time period, the plan’s assets increased from $3.6 billion to over $11 billion.

The complaint also alleges that the following funds underperformed and should not have been selected:

The Artisan Small Cap Value Fund

PIMCO Inflation Response Multi-Asset Fund

TCM Small-Mid Cap Growth Fund

This is not the first time a major client of Fidelity has been sued, which includes cases such as Tussey v. ABB and previously dismissed lawsuits against John Deere, Exelon, and Unisys.

Notably missing from the lawsuit are allegations that cheaper share classes were available but not used, as is alleged in the next lawsuit we will discuss.

Bell v. Anthem

On December 29, 2015, an ERISA lawsuit was filed against Anthem Inc. in the Southern District of Indiana federal court. The allegations in Bell v. Anthem have without question ruffled the feathers of plan sponsors and fiduciaries of large 401(k) plans. This is the first time, to our knowledge, that a plan sponsor has been sued on this scale where Vanguard has been the recordkeeper and their funds have made up the lion’s share of the core options available.

The primary allegation in the complaint is that the plan’s fiduciaries caused Vanguard to be paid excessive recordkeeping fees. Only in 2013, were more expensive share classes of the plan’s funds replaced with cheaper alternatives. This resulted in a reduction of the recordkeeping fees paid to Vanguard through the revenue sharing generated from the funds. Plaintiffs allege that these cheaper share classes were available much earlier than selected, even as far back as the late 1990s. The complaint states that this failure caused $18 million in losses to the plan.

The complaint also goes on to allege that the Artisan Mid Cap Value Fund and the Touchstone Sands Capital Growth Fund were imprudently included in the plan because they were excessively prices as compared to similar Vanguard funds, in addition to more expensive share classes being used until 2013. The plaintiffs also claim that the plan’s fiduciaries failed to use separate accounts for these two funds and collective trusts for the Vanguard target date funds in the plan instead of mutual funds and that this changes would have resulted in less fees paid by participants.

The excessive recordkeeping fees alleged by plaintiffs was between $80 and $94 per participant until 2013 when Anthem negotiated a flat per head fee of $42. This is based on a plan that had between $3.3 and $5.1 billion during the time period in question in the lawsuit. The plaintiffs also allege that the $42 is too much and was excessive by at least 40%.

Finally, the complaint alleges that the plan should have included a stable value fund instead of a money market fund.

Pledger v. Reliance Trust

On December 22, 2015, Pledger v. Reliance Trust Company was filed in the Northern District of Georgia federal court. The issues raised in this complaint are unique to this case and should be carefully studied by any service provider offering outsourced 3(21), 3(38), or 3(16) services.

The lawsuit was filed by participants in a plan sponsored by a company called Insperity Inc. that is a professional employer organization (“PEO”). As a PEO, Insperity provides outsourced human resources and business solutions to small and medium sizes businesses. Typically, these outsourced employees become employees are co-employed by Insperity as well as the client business. Part of the package of services is that these outsourced employees become part of a 401(k) plan sponsored and administered by Insperity rather than the client company.

The participants plaintiffs make a number of claims in the complaint and we will take each in turn. First,  plaintiffs claim that Insperity used the plan’s asset to start and seed a 401(k) recordkeeping business it started to supplement its core business functions. Previously the plan was with another industry recordkeeper and after Insperity started its recordkeeping division, the plaintiffs claim the plan was moved to it without a competitive bidding process. As support for its claims, plaintiffs allege that the plan’s $1.9 billion in assets represented 95% of Insperity’s recordkeeping assets. It is also worth noting that Insperity had a different plan for its corporate workforce and that it was also recordkept by Insperity.

Plaintiffs allege that Insperity derived excessive compensation from the recordkeeping activities and that Reliance Trust Company, also a defendant, was part of the scheme. The complaint alleges that Reliance was hired as the plan’s 3(38) fiduciary investment manager as well as a discretionary trustee. Essentially, the plaintiffs accuse Insperity and Reliance of a quid pro quo that allowed Reliance to pick its own investments for the plan, such as the target date funds selected, which then allowed Reliance to select funds that generated excessive revenue sharing that went to Insperity. The complaint alleges that Insperity received between $119 and $142 per participant per year in recordkeeping fees.

Plaintiffs further accuse Reliance of selecting “untested” and “newly-established” target date funds it managed as collective trusts. Plaintiffs claim that Reliance was charged a sliding scale for managing these assets. What is unclear from the complaint is whether Insperity selected the collective trusts and simply hired Reliance as an investment manager or whether all investment decisions were outsourced to Reliance and they then selected their own products for inclusion. The plaintiffs claim it is the latter. In either case, the Plaintiffs bolster their claims by alleging that the more expensive share class of the Reliance collectives were selected to generate additional revenue sharing to benefit Insperity. They also claim the target date funds had terrible performance that caused losses to the plan of between $41 million and $56 million.

In what may be the most troublesome allegation in the complaint, plaintiffs claim that the Insperity corporate plan, which had only $208 million in assets, had the same investment lineup but used cheaper share classes than the $2 billion plan in six instances. They also claim that the corporate plan was offered a stable value fund, where the plan for the outsourced employees was not, in violation of ERISA.

Smith v. BB&T

On October 8, 2015, current and former employees of BB&T Corporation filed a lawsuit in the Middle District of North Carolina federal court alleging self dealing by BB&T with regard to its own in-house 401(k) plan.

Plaintiffs allege that BB&T has benefited at the expense of plan participants by using BB&T’s own funds which also include those managed by its wholly owned subsidiary Sterling Capital Management. The plan is alleged to currently have about $2.93 billion in plan assets.

According to plaintiffs, until 2009, the plan only had BB&T mutual funds, but since then non-proprietary funds have been added. BB&T has also been the plan’s recordkeeper in addition to the primary asset manager of the plan. Plaintiffs allege that through this setup, BB&T profited at the expense of the plan’s participants by allowing the plan to generate excessive revenue sharing which went to BB&T and not engaging in an arm’s length RFP process to find a different recordkeeper. Like other lawsuits filed by the Schlichter firm, they claim these funds are also imprudent when compared to a lineup of Vanguard fund or if separate account or collective trusts had been used rather than mutual funds.

The complaint also alleges that many of the BB&T funds in the plan were poorly performing including Sterling Capital International Fund. Finally, the complaint also attacks the use of a BB&T money market type product rather than a stable value fund, as well as the unitized structure of the BB&T company stock fund in the plan, an issue that also has been litigated in previous cases.

Also worth noting is that a separate lawsuit has been filed against BB&T by a different plaintiffs firm. That suit, Bowers v BB&T will be litigated along with Smith v. BB&T.

Our Thoughts

What is immediately worth noting is that the cases against Oracle and Anthem do NOT involve allegations of self dealing under ERISA. Such allegations have been the lynch pin of trial decisions and settlements in the recent successes by the plaintiff’s ERISA bar. Instead, the claims attack the process and substance of the fiduciary decision making by the defendants.

On the other hand, the cases against Reliance/Insperity and BB&T both involve allegations of self dealing. The case against BB&T has a familiar pattern and is similar to ones previously filed against Ameriprise and Fidelity.

Also worth noting is that the Pledger v. Reliance Trust case may be the first case to address the common practice of outsourced investment managers using their own products/solutions as substitutes for more mainstream target date funds. This is become a more common thing to see in the form of model portfolios and collective trusts. It will be important to pay close attention to the way in which the relationship was established by Reliance and Insperity, as there is definitely a right way to do it and a wrong way. We will make sure to pass along more information when it becomes available in the case.

One final thought I’d like to discuss is one that anyone who has seen me speak has heard…having an outsourced fiduciary provider in most instances will NOT stop a plan sponsor from also being sued. In Pledger v. Reliance Trust, the complaint states that Reliance was selected as the outsourced investment manager and discretionary trustee. But yet Insperity was still sued and it is alleged that they are as much responsible for the claims involving investments as is Reliance, the outsourced fiduciary. While I understand that Insperity has its own independent claims against it, it is worth emphasizing that Insperity as the plan sponsor still needs to fight its way out of this lawsuit, like any other plan sponsor who might get sued would. While a plan sponsor in another situation, or Insperity here, may be able to show that all responsibility over investments was that of the outsourced fiduciary, the time and expense of defending a lawsuit is very real and many times may be more or as much as the ultimate damages that a court could find against them. The ultimate conclusion here is that for a plan sponsor, outsourcing a fiduciary role to a service provider is not a total insulation from risk. And this lawsuit provides a nice example of that. Instead, there should be other valid reasons (of which there are many) for outsourcing fiduciary roles to service providers.

We will continue to monitor these cases and will be posting soon about the other new cases that have recently been filed.

3rd Circuit Grants Victory to Participants Challenging Church Plan Status

Yesterday, December 29, 2015, the 3rd Circuit Court of Appeals decided in favor of the plan participants in Kaplan v. Saint Peter’s Healthcare System. In the first circuit court opinion in the dozen+ cases that have been filed, the court ruled that the defined benefit plan sponsored by Saint Peter’s Healthcare System is not eligible for the church plan exemption from ERISA. Stated simply, this ruling holds the plan should have been complying with ERISA the entire time, but wasn’t. The consequences are staggering considering state law, which applied in the absence of ERISA, usually has little or no requirements related to funding. The plaintiffs have alleged the plan is severely underfunded. If the decision is enforced, it also means the plan sponsor will need to pay PBGC premiums going back in time. (see our previous coverage on the district court’s opinion that agreed with the plan’s participants: Court Finds St. Peter’s Pension Plan is NOT a Church Plan & A New Case is Filed in Chicago)

The 3rd Circuit’s decision answered this straight forward question: while the law allows a church agency to maintain a church plan, does it also allow an agency to establish one? The court’s decision ultimately said no, only a church can establish a church plan, and Saint Peter’s Healthcare System, which sponsors the plan, is not a church. The court based their decision on the plain reading of the statute and the remedial purposes of the ERISA statute to provide protection to plan participants, rather than exclude them from protection. In so deciding, the court rejected Saint Peter’s arguments that the 1980 amendment to the church plan exemption allows any plan maintained, even if not established, by a church agency to be exempt. In doing so, the court referenced a hypothetical from oral arguments that clarifies the issue and is worth repeating here:

Indeed, St. Peter’s essentially conceded the problem with its reading at oral argument when presented with the following scenario: Congress passes a law that any person who is disabled and a veteran is entitled to free insurance. In the ensuing years, there is a question about whether people who served in the National Guard are veterans for purposes of the statute. To clarify, Congress passes an amendment saying that, for purposes of the provision, “a person who is disabled and a veteran includes a person who served in the National Guard.” Asked if a person who served in the National Guard but is not disabled qualifies to collect free insurance, St. Peter’s responded that such a person does not because only the second of the two conditions was satisfied. This correct response only serves to highlight the fatal flaw in the construction of ERISA advanced by St. Peter’s.

An even more concerning issue for sponsors of church plans where a church established the plan, but a church agency is maintaining it, is the court’s footnote on who can properly be considered a church agency (or church pension board) as they are commonly known:

Although we need not decide the issue, we have substantial reservations over whether St. Peter’s can even maintain an exempt plan. Subsection 3(33)(C)(i) requires that if a plan is to be maintained by an organization that is not a church, it must be an organization “the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches . . . .” In addition, the same subsection requires that the organization be “controlled by or associated with a church or a convention or association of churches.” Setting aside whether St. Peter’s is controlled by or associated with a church (as that depends on disputed facts not properly resolvable at the motion-to-dismiss stage), St. Peter’s itself does not appear to meet the principal purpose test, as its principal purpose is the provision of healthcare and not the administration or funding of the retirement plan. St. Peter’s contends, however, that its Retirement Plan Committee qualifies because the Committee’s principal purpose is to maintain the plan. However, this may be insufficient. See Rollins, 19 F. Supp. 3d at 914 (“[T]he statute does not say that the organization may have a subcommittee who deals with plan administration. Rather, the statute dictates that [the] organization itself must have benefits plan administration as its ‘principal purpose,’ which Dignity plainly does not.”).

If this interpretation would be enforced, it would seriously undermine the use of the church plan exemption in almost all instances except those involving plans sponsored by actual churches or plans maintained by traditional church pension boards, which are far fewer in number than the church affiliated schools and agencies that claim this exemption.

Like the district court before it, the 3rd Circuit also rejects the IRS private letter ruling received by Saint Peter’s on the grounds that the IRS is simply wrong and it should not be given deference because it is based on a memo from the IRS general counsel and not based on a formal adjudication or notice-and-comment rulemaking.

Finally, the court rejected all other arguments of Saint Peter’s regarding legislative history and constitutional grounds. A review of the decision by the interested reader is worth it.

Our Thoughts

This is a significant victory for those who have challenged the broad interpretation of the church plan exemption. It should be given serious persuasive consideration by the other circuit and district courts with similar cases. It is worth noting that this decision comes on the heels of the district court in Medina v. Catholic Health Initiatives deciding in favor of the church affiliated hospital system and against the plan participants. In the decision, decided on December 8, the court came to the opposite conclusion of the 3rd Circuit in Kaplan and held that plans that are just maintained church agencies can use the church plan exemption, as long as they also meet the affiliated and controlled test noted above. The court not only found the plan in that case did, but also strongly suggested the hospital system itself may meet the definition of a church itself.

As I have predicted all along, ultimately this issues will be decided by the Supreme Court or Congress. We are rapidly approaching the former, if Saint Peter’s seeks review. We may also see the latter, as my understanding is that proposed legislation is out there to address these cases.

Finally, the parties in Lann v. Trinity Health Corporation and Chavies v. Catholic Health East have filed notices in their respective cases that they have reached a tentative settlement. We will post on those settlement when they are filed.