Rising Litigation in 401(k)’s and Efforts to Support Business Owners

Financial Planning Dentist

The landscape of litigation under the Employee Retirement Income Security Act (ERISA) remains highly active, as highlighted by the 48 new excess fee and performance lawsuits filed in 2023. While this is a decrease from the 89 complaints in 2022, it still reflects a sustained period of high litigation activity over the past eight years, with 463 excess fee cases filed.

At InSight, we understand the critical importance of mitigating fiduciary risk and ensuring comprehensive documentation of fiduciary processes for 401(k) plans. Our Corporate Plan Manager Services are designed to help plan sponsors navigate this challenging environment, ensuring that their fiduciary duties are met with the highest standards of care and diligence.

Litigation Trends and Challenges

In 2023, the legal landscape was dominated by significant activity in pending cases, including a record 42 settlements and a surge in motions to dismiss, summary judgments, and appellate rulings. Despite a decrease in new filings, the overall volume of excess fee cases remains high, particularly targeting large retirement plans with assets over $1 billion.

The most common claims involve alleged excessive recordkeeping fees and investment underperformance. Notably, legacy law firms continue to pursue large plans based on purported excessive fees, often using data from Form 5500 filings. However, newer plaintiff firms are introducing novel theories of fiduciary liability, including improper indirect compensation to recordkeepers and imprudent use of plan forfeitures.

InSight’s Proactive Approach

At InSight, our Corporate Plan Manager Services are designed to address these evolving challenges head-on. We provide comprehensive support to ensure that 401(k) plans are managed in accordance with fiduciary best practices, thereby mitigating the risk of litigation.

1. Thorough Documentation and Compliance: We help plan sponsors meticulously document their fiduciary processes, including fee disclosures, investment selection, and monitoring procedures. This ensures that all actions taken are well-documented and compliant with ERISA requirements.

2. Fee Benchmarking and Negotiation: Our team conducts rigorous benchmarking of plan fees against industry standards and negotiates with service providers to secure the most favorable terms. This proactive approach helps demonstrate that plan fiduciaries are leveraging the size of their plans to obtain competitive fees.

3. Investment Performance Monitoring: We provide ongoing monitoring and analysis of plan investments, ensuring that they meet performance expectations and align with the plan’s objectives. This includes regular reviews and adjustments to the investment lineup as needed.

4. Risk Assessment and Mitigation: Our services include comprehensive risk assessments to identify potential areas of fiduciary liability. We work with plan sponsors to implement strategies that mitigate these risks, including the adoption of prudent processes for selecting and monitoring plan investments and service providers.

Staying Ahead of Litigation Trends

The trends in 2023 show a clear focus on large plans and evolving theories of liability. InSight’s Corporate Plan Manager Services are specifically tailored to help plan sponsors stay ahead of these trends by implementing robust fiduciary practices and continuously adapting to new legal challenges.

By partnering with InSight, plan sponsors can be confident that their 401(k) plans are managed with the highest standards of fiduciary excellence. Our proactive approach not only helps mitigate the risk of litigation but also ensures that plan participants receive the best possible outcomes from their retirement plans.

As the frequency of ERISA litigation remains high, it is crucial for plan sponsors to have a trusted partner in managing their fiduciary responsibilities. InSight’s Corporate Plan Manager Services provide the expertise and support needed to navigate this complex landscape, ensuring that 401(k) plans are compliant, well-documented, and positioned to withstand scrutiny.

By leveraging our services, plan sponsors can focus on their core business objectives while we take care of the intricate details of fiduciary management. Together, we can achieve the goal of providing secure and effective retirement plans for employees, backed by a solid foundation of fiduciary excellence.

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Kevin Taylor

What Constitutes “Like-Kind” in a 1031 Exchange?

The requirement for tax-deferred exchanges of property has always stated that the Replacement Property acquired must be of a “like-kind” to the property sold, known as the Relinquished Property. This principle has been in effect since the addition of IRC Section 1031 to the tax code in 1921. The basis for this requirement is the “continuity of investment” doctrine, which states that if a taxpayer continues their investment from one property to another similar property without receiving any cash profit from the sale, no tax should be triggered. However, it is important to note that this tax liability is only deferred, not eliminated. Given the significance of this requirement in tax-deferred exchanges, it is essential to understand what exactly “like-kind” means. Fortunately, in the context of real property, the analysis is straightforward. For 1031 exchange purposes, all real property is generally considered “like-kind” to each other, irrespective of the asset class or specific property type. Contrary to common misconceptions, a taxpayer selling an apartment building does not need to acquire another apartment building as a replacement property. Instead, they can choose any other type of real estate, such as raw land, an office building, an interest in a Delaware Statutory Trust (DST), etc., as long as it meets the criteria of being considered real property under applicable rules, intended for business or investment use, and properly identified within the 45-day identification period. It’s worth noting that personal property exchanges are no longer eligible for tax deferral under Section 1031 since the Tax Cuts and Jobs Act amendment in 2018. This leads us to the question: what qualifies as “real property” for Section 1031 purposes? Examples of real estate interests that are considered like-kind include single or multi-family rental properties, office buildings, apartment buildings, shopping centers, warehouses, industrial property, farm and ranch land, vacant land held for appreciation, cooperative apartments (Co-ops), Delaware Statutory Trusts (DSTs), hotels and motels, cell tower and billboard easements, conservation easements, lessee’s interest in a 30-year lease, warehouses, interests in a Contract for Deed, land trusts, growing crops, mineral, oil, and gas rights, water and timber rights, wind farms, and solar arrays. In December 2020, the IRS issued new regulations that provide further clarification on the definition of real property in the Code of Federal Regulations. These regulations specify certain types of “inherently permanent structures” and “structural components” that qualify as real estate and are eligible for exchange treatment. Examples of inherently permanent structures include in-ground swimming pools, roads, bridges, tunnels, paved parking areas, special foundations, stationary wharves and docks, fences, outdoor advertising displays, outdoor lighting facilities, railroad tracks and signals, telephone poles, power generation, and transmission facilities, permanently installed telecommunications cables, microwave transmission towers, oil and gas pipelines, offshore platforms, grain storage bins, and silos. Structural components likely to qualify as real property include walls, partitions, doors, wiring, plumbing systems, central air conditioning and heating systems, pipes and ducts, elevators and escalators, floors, ceilings, permanent coverings, insulation, chimneys, fire suppression systems, fire escapes, security systems, humidity control systems, and similar property. It’s important to note that foreign real estate is not considered like-kind to U.S. real estate, according to Section 1031(h) of the Tax Code. However, U.S. taxpayers can exchange foreign property for foreign property, which is considered like-kind and eligible for Section 1031 exchange treatment, with some limited exceptions. In addition to meeting the like-kind requirements, the potential replacement property must be formally identified within 45 days of selling the relinquished property, and the identified property must be acquired within 180 days of the sale. Property received by a taxpayer that was not identified or received within these timeframes is not considered like-kind. In the past, there was a misconception that the like-kind requirement meant trading into the same type of property that was sold. However, the true intention behind the like-kind requirement has always been to maintain the continuity of investment. While Section 1031 exchanges previously applied to personal property, intangible property, and real estate, the amendment in 2018 restricted exchanges to only real estate. Nevertheless, the determination of what constitutes like-kind real estate has remained unchanged—all types of real estate are considered like-kind to each other.

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Kevin Taylor

Let Bitcoin Fail

Let Bitcoin Fail Before it becomes, too big to fail also. The Federal Reserve and Treasury need to establish a better policy regarding their role and behavior when Bitcoin fails. Continued ‘bailout’ for speculative players in the market has a critical and damning effect on the rest of us. Taxpayers have already lived through the negative economic and social impacts of watching banks and speculators who took on unjustified risks get reimbursed for their recklessness once this century. Watching banks stash and store cryptocurrencies under the same speculative bubble is foreboding. The U.S. simply cannot afford to bail out speculators who have driven the market of Bitcoin past $1T with no concern for uninsured assets. It is already bad enough that U.S. financial regulators have proven to be ill-equipped to enforce current AML and BSA policies in the wake of crypto adoptions. Financial institutions’ exposure to the crypto-asset industry is affecting their bank’s anti-money laundering compliance and oversight and several years’ worth of infractions are piling up at some of the nation’s biggest banks. Additionally, several of the ‘online’ banks that are continuing to offer crypto-trading as part of their expanded services are doing so without the proper due diligence and vetting of their counterparties. Market regulators aren’t watching closely to see how financial institutions’ exposure to the crypto-asset industry is affecting their banks’ anti-money laundering and compliance. As the broader public becomes more interested in crypto assets, some bank customers are seeking ways to fund crypto trading. In this environment, banks need to assess how these activities are isolated from their current operations and be prepared to mitigate illicit finance risks emanating from these new assets. Additionally, the Fed and FDIC allowing high-risk speculative assets to be connected to U.S. currency is as irresponsible as the housing crisis demonstrated; and these Federal authorities need to make more clear that they will let this speculation fail or rise under its own power and that using taxpayers institutions to protect this asset is not in our best interest and a lesson in moral hazard that should eventually be learned. Suspend FDIC insurance for all banks that continue to mask their crypto-speculation with support and protection of the Fed and the FDIC Now.  Contagion is Spreading As major U.S. Banks are getting swept up into the asset bubble they are taking our oversight and insurance institutions with them. In February the U.S. Office of the Comptroller of the Currency (OCC) issued a cease and desist order to New York-based Safra Bank. In the order, the OCC cited that “the bank gave accounts to money service businesses (MSBs) that facilitated crypto-asset trading” but that the bank did not “address the increased Bank Secrecy Act and Anti-Money Laundering (BSA/AML) risks associated with these accounts.” While the OCC has caught this bank, the ecosystem of back offering these ‘crypto trading accounts’ is outpacing the oversight of the banks and regulators. Simply put – the market is growing beyond our ability to control, and U.S. banks supported by the Federal Reserve are connected to this exposure.   In the Safra Bank case, the bank allegedly did not have sufficient transaction monitoring systems in place in the onboarding process to confirm these new “digital asset customers” were legitimate and this caused its volume of domestic and international wires and ACH transfers to spike.  Unfortunately, the OCC has yet to specify the crypto-asset-focused companies involved with Safra’s breach of the KYC ecosystem.  Though the San Francisco Open Exchange (SFOX), has allowed SFOX traders to maintain FDIC-insured cash accounts at the bank. This is general incompetence and complacency that is allowing the crypto asset bubble to contaminate the federally insured accounts at other banks. Liquidity is Drying Up The world’s largest cryptocurrency, bitcoin sits just below $60,000 today, as the total market cap of BTC is above $1.1 trillion. Despite the recent price jump, there is a major concern BTC holders and even non-speculators should be aware of. That is the liquidity of Bitcoin. JP Morgan’s strategist Nikolaos Panigirtzoglou writes “the market liquidity in Bitcoin is significantly lower than S&P 500 and gold.” Panigirtzoglou adds that “even a small change in Bitcoin flows can have a large impact on the price of BTC.” The liquidity issue is driving up the speculative costs of bitcoin but should be a major concern for those that purport the BTC is some kind of store of capital. Low liquidity will have a negative impact on the rash of new Bitcoin lending schemes that are proliferating in the market. Several new companies are offering interest on bitcoin deposits made possible by lending out those coins to speculative investors. As the underlying price of bitcoin rises out of control the borrowers become less and less likely to return the borrowed coin (almost an impossible default rate to handicap). These defaults, coupled with the lack of liquidity, will make it almost impossible for borrowers to cover. If this ‘bank run’ scenario were to play out in cash the Fed can step in to increase liquidity and control interest rates, and the FDIC can insure the lenders against defaults and make them whole. There is no such protection for Bitcoin lenders.   Low Reputation Counter Parties The crypto market has still yet to solve its illegal and illicit underbelly. While widespread adoption is making for more legitimate transactions, it is similarly eroding the capacity of regulators and compliance officers to confirm they are not transacting with corrupting counterparties. While making the ecosystem ‘bigger’ lowers the percentage of bad actors, it also increases their space to hide among legitimate actors. Criminals who keep their funds in cryptocurrency tend to launder funds through a small cluster of online services that exist outside of regulator authority. Essentially saying, banks and speculators are doing business with criminals (if done in dollars is criminal also) but because it’s done in crypto it is willfully existing outside the law. Services like high-risk (low-reputation) crypto-exchange portals, online gambling platforms, cryptocurrency mixing services, and financial services

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