Plenty of Regulatory Action Ahead for Retirement Industry

Upcoming actions from the Department of Labor (DOL), the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA) are all expected to have a direct impact on the way retirement plans are administered under the Employee Retirement Income Security Act (ERISA) and other legislation.

Substantial attention is also being paid to the potential for the U.S. Congress to pass meaningful tax reform at some point in the next few years, according to Drinker Biddle experts, which could involve the reduction or elimination of some tax benefits for workplace retirement savers in the interest of growing government revenues.

In a conference call sponsored by Natixis Global Asset Management, two experts from Drinker Biddle & Reath explored the 2015 regulatory agendas of the DOL, the SEC and FINRA. Bradford Campbell, counsel with Drinker Biddle in Washington, D.C., and former Assistant Secretary of Labor for the Department of Labor’s Employee Benefits Security Administration (2007 – 2009), opened the discussion by quickly interpreting the results of the 2014 midterm elections for the financial services sector.

In short, Campbell feels the 2014 midterm elections, which saw Republican lawmakers take control of the Senate while building an even stronger majority in the House, will be relatively muted for the financial services sector. 

“It’s not going to make a really significant difference in the next two years, because the federal government is still divided, but I do expect the tone around comprehensive tax reform will change and the faults and problems they’re hoping to solve in the retirement system will change,” Campbell explained.  

For example, Campbell noted that much of the interest in recent years in the Senate has focused on potential abuses committed by wealthy people using individual retirement accounts (IRAs) and tax-advantaged retirement plans to shelter assets from taxation. This focus can probably be expected to decline when Republicans take the reins in January 2015, Campbell said. But unlike earlier Republican majorities in the House and Senate, the current Republican class in Congress seems willing to “shake out some additional revenue from the retirement plan system,” Campbell noted, and to make changes to how tax qualified plans are treated by the Internal Revenue Service.

“Both Democrats and Republicans have this as a goal moving into 2015 and beyond, so it’s something we as an industry will have to continue to watch closely,” Campbell said.

Campbell observed that a bill passed last year by the U.S. House of Representatives that would prevent the DOL from establishing a new definition of “fiduciary” until the SEC finished harmonizing its own advice standards under securities law was not taken up by the Democrat-controlled Senate. Now that the Senate is set to go red, Campbell said it may be likely that this bill will be passed by both chambers and sent to the President for a signature or veto.

“The bill could theoretically proceed under the new Congress,” Campbell explained. “That’s something that probably wasn’t possible before the change in control.” However, even this could be relatively unimportant in 2015 and 2016, he added, as the Obama Administration is unlikely to stymie the efforts of its own staff in the DOL by forcing it to wait for the SEC before acting on a new fiduciary rule.

So where does the DOL’s fiduciary redefinition effort stand? Fred Reish, an ERISA attorney and partner with Drinker Biddle in Los Angeles, said the DOL continues to hold to its stated goal of releasing a new proposed fiduciary definition in January 2015, but it’s yet unclear whether it has the ability to follow through.

Campbell noted that the new fiduciary definition, or “conflict of interest rule” as it is referred to by the DOL, was the only major piece of regulation that did not get pushed back on the latest DOL agenda. He also observed that the federal Office of Management and Budget’s (OMB) website has not been updated to say that it has received the new rule language from the DOL. As Campbell explained, the OMB must review new rules and regulations to determine things like the cost of implementation and how the government will manage a enforcement.

“When you consider that the OMB’s normal review process takes at least 90 days, that might tell us something about the real timing of when the new proposal will actually come out,” Campbell noted. “This opens up a few possibilities. Maybe the DOL has been doing a lot of behind-the-scenes negotiation and pre-clearance with OMB, which would allow the new rule to go through very quickly.” Campbell said that type of back-room maneuvering “would be pretty unusual, but it is possible.”

“It’s also possible that the DOL just wants to signal that this redefinition is important and ongoing, so they’ll wait to delay it until the last minute,” he added. “It’s hard to say at this point.”

Asked by Reish to speculate about what the final rule could look like, Campbell said, “I imagine the DOL will in fact create a broad expansion of the fiduciary definition, but my hope is that they will try to mitigate the most severe impacts of this by also issuing new prohibited transaction class exemptions. We won’t know this exactly until we see what’s published and what the industry reaction happens to be.”

Reish noted that another important matter under consideration by the DOL is the use of brokerage windows in employer-sponsored retirement plans. As explained by the DOL, some 401(k)-type plans offer participants access to brokerage windows in addition to, or in place of, specific investment options chosen by the employer or another plan fiduciary.

These “window” arrangements can enable or require individual participants to choose for themselves from a broad range of investments, Campbell explained. In many cases participants can choose from the entire universe of stocks and mutual funds, he noted, comprised of tens of thousands of different options. Some plans even offer a brokerage window in place of a core investment menu. This raises important questions about a plan fiduciary’s ERISA-mandated duty to review and monitor investment options under qualified retirement plans, Campbell noted (see “Brokerage Window Issues Still Open”).

Campbell said the DOL recently closed a request for information period on a list of nearly 40 questions related to brokerage windows, so further action in the near-term is likely. But, he noted that the most recent DOL agenda does not actually list a next step for the effort, and the scope of the DOL's questions was very broad, so it is unclear what’s next.

“The agenda the DOL just put out kept this as an action item but didn’t list a specific next step or deadline, but that doesn’t mean it’s going away, not by any means,” Campbell said. “My sense is that they are going to go through all the comments before deciding what their next step is, but we should expect further action on this in 2015.”  

Campbell said it will be helpful for retirement plan fiduciaries offering participants access to a brokerage window to get more guidance about what liabilities can arise from this type of arrangement. This is an especially important matter in the wake of new fee disclosure requirements, for example under 408(b)(2). 

Importantly, Campbell said there may not be enough time to issue a full regulation on the topic before the end of President Obama’s second term in 2016, but “they could do something more informal, similar to recent target-date fund guidance.”

Reish went on to suggest that potentially the most important regulatory action of 2015 could involve “pension benefit statement requirements,” which would basically oblige defined contribution plan fiduciaries and service providers to furnish retirement income projections for each participant in a plan—likely to be delivered via quarterly statements.   

“For several years now the DOL has been trying to make a regulation that helps a participant understand what their account is really worth,” Campbell said. “So the account will be presented as $300 in monthly retirement income, say, instead of just a gross figure of $180,000. The idea is that this type of estimate would help participants understand if they’re on the right path or the wrong path for retirement readiness.” 

Both Reish and Campbell agreed with the theory behind the pending regulation—that most participants don’t know how to relate a net retirement account balance with their true retirement readiness—but each stressed that it will be exceedingly difficult for the DOL to define how to do the projection properly.

“So from my perspective, I think it will be interesting to see what the DOL comes up with,” Campbell noted. “The technical issues are very hard in terms of doing long-term income projections, especially for someone in their 20s just starting out in a plan, so getting it right is something they’re highly concerned about.”

Campbell said there is significant disagreement across the industry as to whether monthly income figures should be derived from current account balances, or from balances projected forward to the retirement date.  

“The DOL must be very careful to consider how these projections are incenting or preventing good participant behavior,” he said. “Say a young person with a very small balance looks at their current account value and sees only $20 or $30 in projected retirement monthly income. Do we tell them this and risk their dropping out of the plan? Or do we make a lot of assumptions and give them a more favorable picture, but which may not be so accurate in the long run?”

Looking to FINRA and the SEC, Campbell and Reish expect further debate and potential action on conflict of interest rules related to IRA rollover solicitations. This is an area where there is some push and pull between SEC and DOL, Reish said.

“I think DOL will eventually take the position that any advice or solicitation related to a retirement account rollover into an IRA is necessarily fiduciary advice,” Reish said. “This would give the DOL greater jurisdiction over the entire rollover process. Of course, it would be extremely controversial.”

Reish and Campbell continued by observing the SEC and FINRA have historically favored a disclosure-oriented approach to mitigate conflicts of interest, while the DOL looks more towards actually prohibiting certain transactions and advice. This healthy tension can probably be expected to heat up further in 2015, the pair noted, as the regulators each move forward on longstanding fiduciary issues.  

The discussion closed on the topic of 408(b)(2) fee disclosure guides—an idea presented last year by the DOL to help retirement plan sponsors interpret complex investment and service provider fee data supplied under expanded disclosure rules.

Reish and Campbell both underscored the importance of plan sponsors having support in the effort to understand complex fee disclosure documents, but the two were fairly tepid on the idea that a guide or fee summary alone could solve the problem.

“It’s a real conundrum,” Reish said. “How do we ask plan sponsors to do interpret the fee data effectively when the service providers are saying it’s too much of an effort to even go through the data to build a table of contents or a fee guide? It’s hard to see an answer that will satisfy both communities, sponsors and providers. We need an innovative solution here.”