Compliance August 1, 2019

The Retirement Industry Needs a Top Cop’s Guidance

All of the President’s cabinet secretaries have substantial authority to promulgate, interpret and enforce regulations. The DOL Secretary, in particular, can have a big influence on employer decisions and behaviors.
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Art by Adam McCauley

Earlier this month, President Donald Trump tweeted that he plans to nominate Eugene Scalia, son of late Assistant Supreme Court Justice Antonin Scalia, for the position of Secretary of the Department of Labor (DOL).

According to news reports, in a private meeting, President Trump offered Scalia the job and he accepted. The news came after the previous Labor Secretary Alexander Acosta resigned following controversy over his role in financier Jeffrey Epstein’s plea deal for crimes committed when Acosta was a U.S. attorney in Florida.

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As happens when a new Secretary of Labor nominee is publicly floated, stakeholders in the retirement industry quickly began weighing their expectations for how a DOL Secretary Scalia would influence their respective interests. There are already clear differences of opinion emerging with respect to Scalia’s previous professional and public service experience, and how this would impact his performance as a DOL Secretary. But one point of agreement is on the fact that, having served as the Solicitor General for the Labor Department under the Bush Administration, as DOL Secretary, Scalia would likely hit the ground running.

“One thing that is clear is that Eugene Scalia has worked in the trenches of a large number of labor issues for many years and would, therefore, bring to the post a significant level of personal understanding of how to enact President Trump’s deregulatory agenda,” says Brian Netter, a partner in the Washington office of Mayer Brown’s litigation and dispute resolution practice and co-chair of the ERISA litigation practice.

Netter expects that, if confirmed and should he choose to, Scalia could have a big influence on the retirement plan marketplace.

“All of the President’s cabinet secretaries have substantial authority to promulgate regulations and then to interpret and enforce them,” he explains. “This means they can individually have a big impact on regulated entities. The DOL Secretary, in particular, has control over a large swath of players in the U.S. economy. The decisions made by the Secretary are often felt by workers and business owners quite directly.”

Reflecting on the evolving situation, Jamie Hopkins, director of retirement research at Carson Group, says Secretary Acosta’s departure could slow down the DOL’s rulemaking process. However, the same Administration remains in charge of the DOL staff, so it’s also possible his departure will not severely impact the agency’s rulemaking processes. Should he decide to take an active approach, it is possible that nominee Scalia would want to go even further to pull back fiduciary regulations, Hopkins says.

“While Scalia brings government experience, DOL experience, and a very successful litigation background to the position, he has also been extremely pro-business, anti-labor and anti-consumer protection,” Hopkins reflects. “The reality is he has fought hard against consumer protections and fiduciary standards. So if Acosta’s stance was more neutral and actually improving fiduciary standards, it’s possible this effort could be stalled.”

According to Hopkins and Netter, the DOL’s position on promulgating new regulations to address advisory industry conflict of interests is likely to remain murky for some time to come.

“The DOL has a broad preview,” Netter says. “In this sense, it’s hard to know where a new Secretary will focus, whether it’s Scalia or someone else. The popular press coverage of the Labor Department focuses much more on things like overtime rules and wage-hour standards, because these have very considerable effects on the entire U.S. economy. A new fiduciary rule is not seemingly a big priority for DOL, in my estimate. I don’t think a Secretary Scalia would necessarily want the DOL to step in front of the SEC in this process, which is hard at work on Regulation Best Interest.”

Netter suggested that, given Scalia’s recent litigation experience representing clients opposed to the establishment of stricter conflict of interest standards, he would likely be called on by some parties to recuse himself from working on fiduciary issues under the Employee Retirement Income Security Act (ERISA). For his part, Hopkins thinks the DOL under Eugene Scalia could be more active in this area than some at this stage expect.

“Even with a change in the Labor Secretary, expectations are that a DOL fiduciary rulemaking proposal would be out by the end of the year or early next year,” he says. “It is possible that the DOL goes that route now, with the SEC having passed their rules, of just aligning DOL rules with SEC fiduciary rules. For instance, the DOL could try to create a prohibited transaction exemption for ERISA fiduciary rules for anyone complying with the best interest standard of care under the SEC rules. While this, in theory, sounds great—the alignment of the two rules—fiduciary proponents will not be happy.”

This is because the ERISA fiduciary standards of care “have always had a bit more teeth than the SEC rules,” Hopkins says, as the ERISA rules were further explained by Congress to include things like reasonable compensation, fee disclosure, and co-fiduciary liability. “An expansion of the SEC rules into ERISA plans would likely lesson the current standards of care and allow more people to service and provide advice to ERISA retirement plans than currently allowed today,” Hopkins adds. “However, on the other side, it would bring a sense of continuity and rule leveling to the investment and retirement advice arena.”

Among the supporters of Scalia’s nomination to the Labor Secretary post is Dale Brown, president and CEO of the Financial Services Institute. He echoes the fact that the DOL plays an important role in ensuring the protection of retirement investors and ensuring Americans have access to quality retirement advice that is in their best interest.

“If Scalia is nominated and confirmed formally, I think he will be an outstanding Secretary of Labor,” Brown says. “The retirement industry is watching the SEC’s Reg BI and asking whether the DOL will collaborate closely on this. I think Scalia brings a breadth and depth of experience to the role and would coordinate effectively. I’m confident that he will make sure the DOL fulfills its important mandate under ERISA. I think he will bring an investor-focused, measured approach, including recognizing the potential for unintended consequences of rulemaking—and therefore the critical importance of close, close collaboration with the SEC.”

In addition to the issue of conflicts of interest and fiduciary standards, Netter says he will be watching closely to see whether the Labor Department gets more involved in filing amicus briefs in federal courts.

“We know that the litigation targeting 401(k) plans and pension plans is largely driven by plaintiffs’ lawyers,” Netter says. “During the Obama Administration, the DOL was often speaking up to support the initiatives of the plaintiffs’ lawyers. That ‘amicus briefing’ effort had largely stopped during Acosta’s brief tenure at DOL. This means we haven’t seen the DOL standing behind employers in these types of disputes, so it will be interesting to see if that changes under a Secretary Scalia. He may use his litigation experience to be more active in this area.”

With the Senate’s pending recess and the low likelihood of the confirmation process kicking off before the fall season, the Acting Secretary of Labor Patrick Pizzella is aiming to keep the agency humming along. Just this week, the DOL issued a final “association retirement plans rule.” In addition to the final rule, the department has also released a 16-page request for information (RFI) on open MEPs.

Administration July 31, 2019

The Importance of Getting Beneficiary Designations

Not having proper beneficiary designations on file can create a difficult situation for plan sponsors, and with the use of automatic enrollment, fewer participants are revealing their beneficiaries.
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Art by Marc Rosenthal

Picture this: A participant has worked in your company for two decades. He’s contributing to the organization’s defined contribution (DC) plan, utilizing a health savings account (HSA) to maximize health care funds for retirement, and consulting his financial adviser yearly to ensure his steady path towards retirement. Check. Check. Check.

While these components suggest an active and aware participant, plan sponsors and their employees will typically fall short of one key benefits task—naming a beneficiary. Naming an individual eligible to receive an employee’s benefits if he passes away is significant, as it protects an employee’s assets and reduces stress for loved ones, as well as the plan sponsor.

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“It is a specific step in the enrollment process when you’re joining your retirement plan to declare a beneficiary for the assets that you’ve saved, should something happen to you or when you pass away,” says Meghan Murphy, vice president at Fidelity Investments.

However, Murphy notes that over the last decade, the number of workers naming a beneficiary for their accounts has slightly declined, largely due to automatic enrollment. Participants who were auto-enrolled into their company’s plan may miss declaring a beneficiary, as they fail to enroll themselves into the plan. Due to the rise of auto-enrollment in recent years, Generation X and Millennial workers are notably ones who miss beneficiary elections, Murphy says.

“Overall, we have about a third of our recordkept population who don’t have a beneficiary on file, and there’s a lot of education and communication that’s taking place to try and change that,” Murphy adds.

Plan sponsors who auto-enroll their participants should ask workers to complete a separate beneficiary designation form. These forms will establish beneficiary names, the amount each beneficiary should receive and the relationship between a beneficiary and participant. The forms also ask for a beneficiary’s Social Security or taxpayer identification number.

Should a participant fail to name a beneficiary, it can place a toll on the already-difficult experience following an anticipated or unexpected death. Without a designated beneficiary on file, the process can become document-heavy and potentially filled with court visits. And just because a participant signed a will or prenuptial agreement, doesn’t mean those same beneficiaries will receive assets from benefit plans.  According to DWC 401(k) Investors, because estate planning documents including wills and prenups are subject to state laws and retirement planning documentation is a matter of certain federal laws, the above paperwork is essentially overlooked throughout this process.

“It can drastically increase the length of time it takes for their loved ones to receive those proceeds, following their death,” Murphy explains. “Whereas if you have a beneficiary on file, it’s a relatively easy process to transfer the money, especially in unexpected circumstances where it can only add to people’s stress during that time.”

In this case, DWC 401(k) Experts say plan documents will specify who plan sponsors can designate assets to, typically in the order of surviving spouse; children in equal shares; surviving parents in equal shares; and lastly, estates. Of course, this could have its own set of barriers, as a participant could have been going through a divorce, have step-children or an estranged child that would further add complications.

“Those designations are pretty strict once they’re set into place,” says Murphy. “So, if a participant is in the process of going through divorce or having a baby, [updating beneficiaries] should definitely be one of the things on his checklist.”

Of note, in 2015, a court ruled an employer’s retirement plan documents did not incorporate beneficiary designation forms in its language or appendices, so the forms did not govern the award of benefits.

If a beneficiary cannot be located or has passed away and the plan sponsor has not been contacted requesting beneficiary payments, a law shareholder process allows employers to locate a ‘next-in-line-kin’ to transfer assets to, according to Murphy. A plan sponsor would have to go through a court process at this point, and until a beneficiary is identified or elected, the deceased participant’s assets will remain invested in the plan. 

Experiences such as these are why adding an annual benefits enrollment period—allowing participants to check in every year and confirm overall balances, investments and beneficiary designations—is critical to both the plan sponsor and employee. It’s especially important for participants who forget to fill out a form or forget who their beneficiaries are.

“If participants are not sure who their beneficiary is, they can always check with their human resources [HR] department,” Murphy says. “Again, if a participant has been with an employer for a long time and has forgotten if they’ve even gone through this process, they’re better safe than sorry.”

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