Regulatory Follow Up
The Spring 2016 issue of Benefit Bylines was devoted exclusively to regulatory issues impacting (or potentially impacting) employers who sponsor private retirement plans and their employees. There have been further developments on several fronts throughout the past couple of months that are discussed briefly here. (Each of the headings below refers to the title of the corresponding article in the Spring Newsletter).
DOL Fiduciary/Conflict of Interest Proposal Stirs Controversy
As anticipated, the DOL did issue "final" fiduciary advice/conflict-of-interest regulations shortly after publication of ABP’s Spring newsletter. These new regulations redefine the term "fiduciary" with respect to advisors and brokers who provide investment services in conjunction with employee retirement plans covered by ERISA, as well as Individual Retirement Accounts (IRAs). The new regulations do not apply to individual (non-IRA) investors or to the advisors and brokers who service them. The most controversial and far reaching aspects of the final regulations relate to provisions addressing what the DOL perceives as inherent conflicts of interest in the way some investment products and services have historically been sold to retirement plans and IRA accountholders. They have approached this, in part, by expanding the definitions of “fiduciary” and “fiduciary investment advice.” Under the final regulation, almost anyone who provides investment advisory services for a fee in conjunction with retirement plans and IRAs will be classified as a fiduciary. This is a major departure from longstanding prior guidance under which Registered Investment Advisors (RIAs) have typically served in a fiduciary capacity with respect to the services they provide, but most brokers have not done so. As we noted in the Spring newsletter, these regulations are highly controversial. Proponents believe that the DOL’s actions will provide much needed reforms that address inherent conflicts-of-interest between investment providers and their clients. Opponents argue that the DOL has exceeded its authority by making far reaching changes that should be legislated by Congress rather than implemented by administrative action. With several Democratic supporters, the Republican-controlled House and Senate passed legislation to formally disapprove/nullify the DOL’s final regulations. However, as expected, President Obama vetoed that legislation and there were not enough votes to override his veto. Subsequently, a number of lawsuits have been filed against the DOL challenging these regulations. Litigants include the US Chamber of Commerce, various state chambers and business associations, and the National Association for Fixed Annuities. Despite these initiatives, most financial services companies and broker dealers are frantically attempting to put strategies, systems and procedures in place to position themselves to comply with the regulations when they take effect in April 2017.
Participant Education is Still Education
The final regulations did positively address some of the comments and criticisms that the DOL received from various audiences following the issuance of proposed regulations. One very positive development is that the final regulations did carve out provisions that were in the proposed regulations that would have treated information historically considered to be participant education as fiduciary investment advice. For example, had the DOL’s original proposal gone into effect, providing a group of employees with a sample investment allocation for a 30-year-old participant with moderate risk tolerance might have been considered to be fiduciary investment advice. While plan sponsors and many advisors acknowledge that they are fiduciaries with respect to many of their plan responsibilities, most would not willingly take on the liability associated with providing more or less generic information to employees at group meetings or on their websites if that information rises to the level of being considered fiduciary investment advice. Fortunately, the final regulations adopted a common sense approach regarding participant education similar to long-standing guidance provided by the DOL itself back in 1996 (Interpretive Bulletin 96-1). Given the magnitude, complexity, and far reaching nature of the DOL’s new regulations, securities broker-dealers and advisors are evaluating alternative strategies with respect to the products and services they will market to retirement plan sponsors and IRA accountholders in the future. Fortunately, the final regulations do not take effect until April of next year. If you are a plan sponsor, you will most assuredly be contacted by your plan’s advisor to discuss the extent, if any, to which the new regulations will impact your relationship and the manner in which services will be delivered in the future.
DOL Guidance Favors State Run Plans
In an attempt to encourage more workers to begin saving for retirement, an increasing number of states are considering the possibility of creating state-sponsored retirement/savings programs covering private-sector workers. These initiatives reflect a growing concern about the number of workers who are not currently saving for retirement through traditional employer sponsored plans that are subject to ERISA. The lack of universal coverage is due at least in part to the fact that ERISA does not require private sector employers to establish plans covering their workers, and employers who do adopt plans can generally exclude part-time individuals who work less than 1,000 hours per year. At last count, 25 states have introduced legislation to create or explore the feasibility of creating state-sponsored retirement/savings programs covering private sector workers. This is a major development because, under ERISA, jurisdiction over retirement plans covering private sector employees has historically been thought to be the sole responsibility of the Federal government. Last November, the DOL issued what many view as perplexing guidance that not only paves the way for states to create retirement/savings arrangements that compete with the private sector employers and vendors but does so in a manner that provides states with a competitive advantage over the private sector. As reported in ABP’s Spring newsletter, the DOL issued guidance that would authorize states to require mandatory employer participation in payroll deduction IRA arrangements that provide automatic enrollment provisions, with the arrangement being exempt from ERISA. However, private sector employers who offer similar programs would nonetheless be required to fully comply with ERISA’s fiduciary, administrative and prohibited transaction rules. In addition to submitting comments to the DOL, the American Retirement Association/ASPPA has continued to express concerns about the flaws and inherent unfairness of the DOL’s guidance to various members of Congress. On another level, the Investment Company Institute (ICI) provided comments to the State Treasurer of California last March relative to that state’s proposal to implement a retirement program covering private sector workers. ICI suggested that California delay further implementation of that program until further analysis is conducted. ICI’s General Counsel went on to say that ICI’s own analysis indicates that the earlier analysis conducted for the state failed to recognize all costs and may have overestimated the opportunity to expand retirement coverage.
While many problems are more appropriately addressed at the State rather than Federal level, expanding private sector retirement coverage is not one of them. While it may not be an apples- to- apples comparison, many states have done a lousy job with respect to managing the defined benefit retirement plans covering their own employees. In many instances, politics have resulted in excessive benefit promises and major funding deficiencies. At both the Federal and State levels, elected and non-elected officials have tended to create unnecessary complexity, and then wonder why the results are less favorable than anticipated. Private sector employers and service providers have done a pretty good job in navigating the complexities of ERISA to enhance private sector retirement security. Creating and administering different programs in the various states seems to be highly inefficient, particularly when time-proven delivery systems are already in place in the private sector.
Proposed Changes Would Impact Class Allocation (Cross-tested) Plans
We saved the best news for last. As noted in ABP’s Spring Newsletter, the IRS issued a misguided proposal last January that would have imposed new discrimination testing requirements on plans with class allocation profit sharing provisions. The practical implication of the proposed rules, if they became final, would have been a substantial reduction, if not total elimination, of employer contributions to many plans with class allocation provisions. While the IRS was targeting owners and key employees, most of the plans that the proposed changes would impact actually make higher contributions for rank and file employees than plans without class allocation provisions. So, the unintended consequence of the IRS initiative would have been a reduction in contributions for lower and middle income workers as well as their bosses.
The American Retirement Association/ASPPA promptly engaged in an aggressive campaign (a) to educate the IRS about the detrimental impact that its proposal would have and (b) to mobilize retirement professionals and their clients to contact their elected officials and the IRS to express their concerns. As part of this initiative, ABP reached out to our clients who would be most directly impacted by the proposed changes. We encouraged them to participate in a nationwide lobbying effort. We also requested support from the advisors, accountants and attorneys who work with clients who sponsor tax-qualified retirement plans. The entire process was facilitated by access to a website created by ASPPA that made it easy to write to each of our Federal legislators and to sign a petition to the IRS. Our efforts paid off. Within an almost unprecedented time frame, the IRS issued an announcement advising that it was withdrawing the parts of its proposal that we identified as being problematic. So, we are pleased to advise that it is "business as usual" for our clients who sponsor retirement plans that include class allocation profit sharing provisions. We want to thank everyone who participated in this lobbying initiative.