Compliance June 16, 2016

PSNC 2016: Fiduciary Rule Fundamentals

The final fiduciary rule is out, so what do you need to know? And, just as important, what can you do right now to prepare? 

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According to Steven Wilkes, of counsel, the Wagner Law Group, there are more than a few pressing items that should be top of mind for plan sponsors heading into the back half of 2016—but chief among them is probably prepping for the Department of Labor’s (DOL) fiduciary rule reform.

Wilkes outlined his argument during the opening day of the 2016 PLANSPONSOR National Conference, held for the first time this year in Washington, D.C. Just a few miles from the department’s headquarters, he urged plan sponsors in the audience to study the broadening of the DOL’s definition of the term “fiduciary” directly to determine how it will apply to the intricate workings of their own plans.

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It won’t be easy or particularly fun actually sitting down and reading the 1,000-plus pages of rulemaking, he admits, but there is so much that can vary from plan to plan that individual sponsors absolutely must perform their own review. “The time to start asking questions of your service providers is now,” he suggested, warning those who simply take a cursory look or simply do nothing at all may find themselves in for a rude awakening as implementation deadlines pass in 2017 and 2018.   

“Service providers should be eager to help you make any necessary adjustments, and any plan counsel you have access to should review your documentation and the documentation needed by any providers to qualify for exclusions/exemptions,” Wilkes said. “It’s a complicated rule, but there is nothing like engaging with the language yourself and asking the tough questions for yourself.”

On Wilkes’ reading, the new rule “clearly broadens the scope of advisers who will be deemed to be individual retirement account (IRA) or defined contribution (DC) plan fiduciaries.”

“It impacts all plan vendors in at least a peripheral way,” he warned, “not just broker/dealers or registered investment advisers earning commission-based compensation. Exclusions from the new definition will directly encourage the increased flow of information to plans, so that is something else to watch out for. You will soon start seeing drafts of disclosures and warranties coming from asset managers, advisers, recordkeepers and other providers.”

Staying true to the “Fiduciary Rule Fundamentals” presentation title, Wilkes explained the key deadlines plan sponsors should be working towards alongside counsel and plan providers.

“We all remember the new rule was finalized on April 8, 2016, and barring any successful litigation that could put the brakes on implementation, the new definition is effective just about a year later, on April 10, 2017,” he said. “The phase-in of the prohibited-transaction conditions start with the interim conditions, effective April 10, 2017, and then they roll into heavier conditions going into effect Jan 1, 2018.”

NEXT: Boiling it all down

According to Wilkes, the new prohibited transaction exemption requirements will generate significant new disclosures and warranties needing review by plan sponsors and counsel.

He predicted one of the most abrupt changes plan sponsors will face is that the new fiduciary definition seems to include one-time advice, dropping the “regular basis” condition that previously existed under ERISA’s so-called five-part test.

“There is no longer a need for ‘mutual understanding’ of parties in order for the fiduciary relationship to be triggered. Advice may address particular investment needs or a particular investment decision, and does not necessarily need to be individualized, to cause one to be a fiduciary. Clients only need to receive advice. Some are arguing the advice does not even need to be the ‘primary basis,’ and they’re probably correct, depending on how the rule gets enforced.”

Even with a broadened rule, Wilkes was quick to add that there will still be forms of non-fiduciary service out there. “Platform providers are excluded from the rule in some important ways, for example, and so are those engaged solely in unbiased investment education,” he explained. “General communications a reasonable person would not view as investment recommendation are also excluded, such as newsletters, talk shows, speeches at conferences, research or news reports, market data, etc.”

Wilkes added that large plan sponsors will see the rule play out a little differently, given the “sophisticated investors” exclusion which basically allows large plans and their advisers more flexibility built around the assumption that sponsors at the largest plans will have sufficient experience to protect themselves and their participants from any bad deals. But even large plan sponsors taking advantage of this exemption may see significant changes in terms of product availability and documentation, and they should be prepared in some cases to start paying more for services that may have previously been inexpensive or even complementary—now that they are deemed to be “fiduciary” services.

Overall, Wilkes advises sponsors not to pay too much attention to the crop of lawsuits that have come up in recent weeks, seeking to halt the DOL rulemaking via the district or appellate courts.

“So far I have seen nearly 30 different points of complaint against the rulemaking, contained in a small handful of lawsuits, ranging from First Amendment challenges to suggesting the DOL is purposefully being arbitrary and capricious in widely expanding its fiduciary standard,” he said. “There are some important issues to consider in these complaints, certainly, but I have to say we are expecting that the new rule is here to stay and that the deadlines we have seen will be enforced.”

Compliance June 15, 2016

PSNC 2016: Washington Insights

Litigation is the main concern for DC plan sponsors right now.
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The 2016 PLANSPONSOR National Conference discussion of legislative, regulatory and judicial developments in the retirement plan industry was strongly focused on litigation.

Which makes sense, as David Levine, principal with Groom Law Group, Chartered, explained that Washington and the courts are intertwined. “Laws are passed, then plaintiffs’ lawyers search for issues,” he said. “Laws create avenues for compliance, enforcement and litigation.”

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And there is more Employee Retirement Income Security Act (ERISA) litigation than there’s ever been, added Jamie Fleckner, a partner with Goodwin Proctor LLP. He noted that, in the past year in particular, there has been a huge uptick in litigation focused on plan fees and types of investments. He said the factors contributing to this include the Supreme Court decision in Tibble v. Edison, which contemplated why a large plan sponsor would use retail rather than institutional shares of mutual funds; the Supreme Court taking away the statute of limitations defense, saying plans have an ongoing duty to monitor investments; and the large amount of money involved for plaintiffs’ lawyers. “Plaintiffs’ lawyers get about one-third of settlements,” he said.

Lisa Barton, a partner at Morgan, Lewis & Brockius LLP, said she spends considerable time encouraging plan sponsor clients to meet quarterly about investments and make sure they are having effective discussions, which they then document. She noted that litigation is affecting plans of all sizes. Plan sponsors need to set up a committee to monitor funds, share classes and fees.

“You should adopt a process, and make sure you follow it,” added Levine. “‘Set it and forget it’ doesn’t make sense for anything regarding retirement plans.” He also observed that plan sponsors shouldn’t spend time—and committee meeting minutes shouldn’t reflect—discussing “how not to get sued.”

According to Barton, it is also important to explain fees to participants. “Let them know, ‘If you’re in these funds, you will be paying these fees, but if you are in these other funds, you won’t,’” she said.

NEXT: Flavors of litigation

Fleckner pointed to a common theme in the existing retirement plan litigation: Large plans should be using institutional shares rather than retail shares. “But the institutional shares may not ultimately be cheaper, because there is revenue sharing,” he said. “That’s one reason it is important to document the process of selection. Plaintiffs’ lawyers do not know the processes.” In other lawsuits, there has been a perception of conflicts—the plan uses the recordkeeper’s proprietary funds, or is doing other services for the plan sponsor. According to Fleckner, he is seeing plan sponsors that make changes to their plans targeted in lawsuits because plaintiffs’ lawyers say, “Aha, you must not have been following your fiduciary duty before.” He told attendees not to fear making changes, because to monitor and make changes is their duty.

Fleckner said he also sees the potential for litigation as plan sponsors try to “institutionalize” their defined contribution (DC) plans to make them more like defined benefit (DB) plans, especially if plan sponsors have both plan types and the same committee for both. They may be questioned as to why better or more effective investments had been used in the DB plan.

If there are changes made, the messaging to participants is important, said Barton. “Sometimes plan sponsors want to say, ‘Look at this great change we made,’ but employee-friendly messaging could make employees think there was a problem before,” she told attendees.

Regarding other types of litigation, Levine said that courts are split among the spate of “church plan” cases in which participants argue that an entity’s “church plan” fails to meet the definition of ERISA and therefore is subject to ERISA funding rules. He noted that many courts are rejecting the Internal Revenue Service’s (IRS’) interpretation of “church plan” under ERISA. And while it will take a long time for these cases to weave through the litigation process, he definitely thinks this issue will result in further legislation.

Finally, recognizing that another plan discussion at the conference would focus on the fiduciary rule, Levine said that the rule could create an opportunity for litigation against plan sponsors as well. “Your education and service contracts with providers will change,” he pointed out. “Right now, you should focus on how you plan to review these new contracts, because if you don’t, and something goes wrong, the Department of Labor [DOL] could ask why you agreed to the contract.”

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