Compliance August 3, 2022

Complexity of QPAM Proposal Could Be a Concern

Attorney calls the objectives of EBSA's proposed amendment 'sensible,' but said implications could be 'unexpected and worrying.'
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The Department of Labor’s Employee Benefits Security Administration in late July announced a proposed amendment to the Class Prohibited Transaction Exemption 84-14.

The PTE is commonly known as the “qualified professional asset manager exemption,” and its basic purpose is to permit various parties who are related to retirement plans covered by the Employee Retirement Income Security Act’s fiduciary provisions to engage in otherwise-barred transactions involving retirement plans and individual retirement account assets. To satisfy the QPAM exemption, the assets in question must be managed by QPAMs that are “independent of the parties in interest” to the plan and that meet specified financial standards, among other conditions.

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The proposed amendment includes a number of important changes. As summarized in an EBSA press release, the amendment would better protect plans and their participants and beneficiaries by, among other changes, addressing what EBSA calls “perceived ambiguity” as to whether foreign criminal convictions are included in the scope of the exemption’s ineligibility provision. The amendment further expands the ineligibility provision to include additional types of serious misconduct. Other provisions focus on mitigating potential costs and disruptions to plans and IRAs when a QPAM becomes ineligible due to a conviction or other serious misconduct.

Other changes the amendments would make include an update of the asset management and equity thresholds in the actual definition of “qualified professional asset manager” and the addition of a standard recordkeeping requirement that the exemption currently lacks. Finally, the amendment seeks to clarify the requisite independence and control that a QPAM must have with respect to investment decisions and transactions.

A Surprise Proposal

Speaking with PLANSPONSOR about the implications of the amendment, Carol McClarnon, a partner on the tax group of Eversheds Sutherland, calls it “unexpected and worrying.”

“In its press release announcing the proposal, the DOL named six objectives of the proposed changes,” McClarnon says. “On their face, these objectives would appear to be sensible clarifications. However, the actual conditions being proposed to attain these objectives reveal that the proposal would add significant costs and liability exposure to managers, perhaps even limiting the QPAM exemption as a viable solution.”

As McClarnon observes, before the proposal’s publication last week, the common perception among regulatory experts in the retirement plan industry was that the DOL was unlikely to direct EBSA to take an action like this, as the DOL’s key sub-agency is still operating without a Senate-confirmed head.

“The perception has been that EBSA has put a lot on hold,” McClarnon says. “We did know that the QPAM issue was on EBSA’s radar, but I think it is fair to say that few people expected to see a proposal as ambitious as this to come out right now. Frankly, I was pretty amazed to see this proposal come out.”

A Fundamental Exemption

McClarnon says the QPAM exemption is of fundamental importance to the operation of the modern retirement plan system. This is because so many plans invest in pooled funds and group-style investments with other plans and third parties, and because of the way ERISA defines and treats “parties in interest” to retirement plans or other institutional investors subject to ERISA’s fiduciary provisions. Any party in interest to a given retirement plan may be prohibited from entering into certain transactions with that plan if the transaction will result in additional compensation going to the party in interest, McClarnon notes.

Parties in interest may include, among others, fiduciaries or employees of the plan, any person who provides services to the plan, an employer whose employees are covered by the plan, an employee organization whose members are covered by the plan, a person who owns 50% or more of such an employer or employee organization, or relatives of such persons.

McClarnon explains that certain plan transactions with parties in interest are prohibited under ERISA and are required, without regard to their materiality, to be disclosed in the plan’s annual report to the DOL.

“In practice, the QPAM exemption is used very commonly and for a variety of different purposes,” McClarnon says. “Just imagine if you had, say, 1,000 ERISA-covered retirement plans invested in a given fund. Each of those plans will have a ton of parties in interest. In the most basic terms, what the QPAM exemption does is state that, if you as the asset manager meet the regulatory qualifications, most transactions with these parties of interest in the plan are OK. The new proposal addresses the qualifications in a meaningful way.”

A Burdensome Proposal

Based on her initial reading and discussions with colleagues, McClarnon says the proposal appears to be “so burdensome that it could almost be said to essentially change the availability of the QPAM exemption.” She points out that, in the nearly four decades since the QPAM exemption framework was first established, the financial services world has become far more interconnected.

“In today’s industry, you just have a lot more complexity, with larger conglomerates and highly sophisticated international entities that do business with U.S. retirement plans,” McClarnon says. “The proposed framework, if it is not adjusted after the comment period, will make it very difficult for these types of entities to reliably and efficiently use the QPAM exemption, in my opinion.”

As an example, McClarnon points to the provision in the proposal that declares that the entrance of a QPAM-affiliated person into a non-prosecution agreement will trigger the ineligibility restrictions.

“To me, that’s concerning, because you do not generally speaking admit criminal wrongdoing when entering into such an agreement,” McClarnon says. “There is also a new concept and condition that they have called ‘integrity.’ The proposal says that the DOL can disqualify an entity from using the QPAM exemption based on their own internal examination process and the determination that a QPAM exemption user has not acted with integrity, which they define in the proposal by using various examples and stipulations. In my opinion, there is very little due process recourse for an entity that finds itself in this situation.”

McClarnon says she is perhaps most troubled by the provision in the proposal that seeks to isolate retirement plans from harm if a service provider they work with has its QPAM exemption revoked by EBSA. One must consider the potential consequences of such a framework, she says.

“They don’t want to cause hardships on the plans in cases of disqualification, which makes sense,” McClarnon says. “However, the proposal seems to require that the investment manager sign a written agreement where they declare that, if there is a criminal finding or the ineligibility provision is triggered for some other reason, the QPAM itself has to pick up the full cost of helping the plan make a transition to a new investment. Just imagine the potential cost of this if we are taking about a mega-sized retirement plan or group of plans.”

What Comes Next

McClarnon emphasizes that she understands the DOL and EBSA have a critical job to do in protecting retirement plans and their participants. However, she expects the investment community to respond forcefully to this proposal, and that the comment period could help EBSA constructively refine the proposal.

“The potential for unintended consequences here is so significant,” McClarnon says. “The exemption serves a critical purpose in the current retirement plan system. It is meant to allow plans to be able to invest in things that would otherwise have technical prohibited transaction restrictions on them that do not actually relate to potential operational conflicts of interest. If the proposal is not refined, you could see investment providers not wanting to take on this type of exposure.”

The one element of the proposal she would most want to see changed, McClarnon says, is the contractual requirement related to the QPAM covering the full expense of a fund transition on behalf of a plan.

“I really don’t like the forced contractual requirement,” McClarnon says. “I don’t think EBSA should be telling people these contracts have to be set. I also want to point out that, yes, a giant financial services company may be able to figure out how to make this new framework work, and they may even have the scale and resources to meet the hold-harmless provisions. But a lot of small advisers use this exemption all the time, and in fact it is baked into many standard operating agreements used by all different parties in the industry. It is very common in all kinds of collective investment trust agreements, for example, and we know these investments are becoming more popular. There are just so many traps for the unwitting and the unwary in all this.”

Benefits July 19, 2022

Helping Employees Prepare for Current and Future Health Care Costs

Similar to the shift from defined benefit to defined contribution retirement plans, employees and retirees now need a plan for addressing health care costs.
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HEALTH CARE COSTS HAVE A SIGNIFICANT IMPACT on financial security, but these expenses are often overlooked in retirement planning.

Similar to the shift from defined benefit to defined contribution retirement plans, employees now have more responsibility for health care costs. Rising deductibles are one contributor to this trend; 29% of workers were enrolled in a plan with a general annual deductible of $2,000 or more for single coverage in 2021, according to the Kaiser Family Foundation. Meanwhile, fewer employers offer retiree health insurance to help fill the gaps in Medicare coverage.

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Both changes affect employees’ preparation for the future: If you have trouble paying your current medical expenses, you could land in debt, raid retirement accounts or reduce your contributions, making it even more difficult to save for the growing costs of health care in retirement.

“More responsibility and more financial decisions are placed on employees than there were in the past, and at the same time health care and retirement systems have become more complex,” says Jennifer DeMeo, financial resilience solutions leader at WTW, the benefits consulting firm formerly known as Willis Towers Watson. “Supporting employees with tools and resources to make those decisions is really key.”

 

Health care debt is a major problem for many people, even with insurance: The 2022 Kaiser Family Foundation Health Care Debt Survey found that six in 10 working-age adults with health insurance coverage have gone into debt because of medical or dental expenses in the past five years. And the numbers can be high: 44% reported owing at least $2,500 in medical or dental bills, and 12% owe $10,000 or more.

The cost of health care in retirement is rapidly increasing, too. Even though Medicare covers many health care costs after age 65, out-of-pocket expenses for premiums, deductibles and copayments can be substantial. Medicare Part B premiums increased at a record level over the past year, to $170.10 per month in 2022 for most people (and from $238.10 to $578.30 per month per person for single people with an income above $91,000 and for married couples filing a joint tax return with an income above $182,000).

Over the year, a couple with standard premiums will pay more than $4,000 for Medicare Part B in 2022, not counting other out-of-pocket costs.

If you add up these expenses over a lifetime, the figures can be enormous: Fidelity’s annual Retiree Health Care Cost Estimate found that a 65-year-old couple retiring in 2022 can expect to spend an average of $315,000 in health care expenses throughout retirement—even though they have Medicare coverage—for premiums and out-of-pocket costs.

“We publish this pretty shocking number because we want to educate people to save as early and as often as possible,” says Hope Manion, senior vice president of workplace consulting at Fidelity. “We recognize that health care spending is a significant barrier to financial wellness. To support customers and clients in financial well-being and retirement planning, it’s a critical component of that conversation.”

Even though the costs are spread out over a lifetime, many people aren’t considering those expenses in their retirement plans.

“When I talk to employees and they’re planning for retirement, they are not factoring health care costs for the most part into what they need to save,” says Brea Dantin, an adviser with ProCourse Fiduciary Advisors, which serves as an adviser on about 170 retirement plans. She says that people who are getting one-on-one financial coaching are generally taking health care spending and saving into consideration, but most other people are not.

“People don’t realize what Medicare doesn’t cover and how it actually works, so we try to start hitting people with those messages even in their early 50s,” says Nick Austin, a benefits consultant with Intellicents. “I’ve started to take that message even younger, so when people still have time to save they get an idea that Medicare doesn’t cover everything.”

Coordinating Health and Retirement Planning

“I think one of the areas of change we’re seeing is employers focusing more on the total financial picture, providing additional tools and support to help employees both with short-term financial needs, such as managing high-cost debt, paying off student loans [and] saving for emergencies, and put them on a secure track on the short term so they can also focus on longer-term retirement savings,” says DeMeo. “It’s interconnected. It’s providing financial education, tools and financial coaching to help employees with [the] short term and long term.”

But this can be difficult if retirement plans and health benefits are two separate silos within a company’s HR department. “Retirement advisers are holding meetings, and health insurance brokers are holding other meetings, and they’re not commingled conversations,” says Dantin. Letting “the retirement plan adviser and insurance broker get into the same room with the committees can come up with combined strategies.”

The health and retirement specialists can provide joint education, too. “One of the best things I’ve seen is a joint session, and I’ve done this particularly as a pre-retirement session, where the benefits broker will be invited and we’ll be there,” says Austin. “They’ll talk about Medicare and we’ll talk about Social Security, and we both weave together what retirement looks like and how those HSA dollars interact.”

Using Health Savings Accounts for Retiree Health Care Costs

In addition to helping participants factor health care costs into their retirement savings plans, plan sponsors can also help educate them about the best ways to save for these expenses.

Many employers offer a health savings account paired with a high-deductible health insurance policy, but many people don’t know how to make the most of them. “It’s the least understood, most underutilized benefit out there today, and one of the most powerful,” says Austin.

HSAs offer a triple tax break: Contributions are made pre-tax, after which the money grows tax-deferred and can be used tax-free to pay eligible medical expenses in any year, now or in the future, unlike flexible spending accounts that have use-it-or-lose-it rules.

To qualify in 2022, you must have an HSA-eligible health insurance policy with a deductible of $1,400 or more for self-only health insurance coverage, or $2,800 for family coverage. People with single coverage can contribute up to $3,650 for the year, or up to $7,300 for family coverage, plus an extra $1,000 if you’re 55 or older.

You can then withdraw the money tax-free for eligible medical expenses, including insurance deductibles and copayments, out-of-pocket costs for prescription and over-the-counter medications, and other expenses that aren’t covered by insurance, such as for vision, dental and hearing care.

Many people don’t realize that you can use the money for even more expenses after you turn 65. You can’t contribute to an HSA after you enroll in Medicare, but you can withdraw money tax-free from an HSA to pay premiums for Medicare Part B, Part D prescription drug coverage and private Medicare Advantage plans, but not Medigap policies, says Roy Ramthun, president of HSA Consulting Services. You can also use money tax-free from an HSA to pay eligible long-term care insurance premiums (with the amount limited by age) and some long-term care expenses, most of which are not covered by Medicare, he says.

You’ll have to pay taxes and a 20% penalty for non-qualified withdrawals before age 65, and taxes on non-qualified withdrawals after that. But you won’t have taxes or penalties if you withdraw the money tax-free for eligible expenses at any age.

Improving HSA Investments and Education

Some HSAs don’t have investments to match this long-term savings strategy.

“There are still HSA solutions out there that only offer a money market fund, and that is also detracting from people’s ability to invest,” says Dantin. “Somebody who is going to put money into an HSA for 10, 20 or 30 years can’t do that at a 1% interest rate.”

And many plan participants with other options still keep the money in cash, regardless of when they plan to spend it. “The vast majority of assets in HSAs is sitting in cash, and that is unfortunate,” says Austin. Instead, an HSA provider can offer a menu of mutual funds, similar to a 401(k), and Austin says he’s seen some HSA vendors mirror the investment menu offered in the employer’s 401(k), making it easier for advisers to help participants make investment decisions on both plans. “If we can come in as an adviser and consultant on the 401(k) and can give similar advice on the HSA menu of investment options, that can help more participants move in that direction.”

He also recommends providing more guidance to help employees split their contributions between their 401(k) and HSA if they can’t afford to max out both. “We always tell participants that you should save enough in your 401(k) plan to get the maximum match, then max out your HSA, and if you can save more come back to the 401(k),” he says. “The tax advantages of the HSA are even better than a Roth 401(k).”

Both types of accounts should be part of the retirement savings conversation. “Health savings accounts are not a substitute for traditional retirement plans, but they are complementary,” says Ramthun. “Using an HSA along with a retirement plan to save for health care expenses in retirement is a better strategy than using just retirement accounts.”

Help With Current Health Care Costs

Even though HSAs can be a powerful tool to help save for future health care costs, some employees are not in a financial position to make the most of them. “What we’ve been addressing is a concern of true affordability for everyone,” says Regina Ihrke, leader of health, equity and well-being practice at WTW. “Sometimes, even though an HSA is awesome, some low-wage workers could not cover the deductible.” A lot of people can’t afford to cover $400 in medical expenses, much less than a deductible of $1,400 or more, she says.

Some employers help by contributing to employees’ HSAs, with an average annual contribution of $575 for single coverage and $987 for family coverage, according to the Kaiser Family Foundation.

Employers may also offer supplemental insurance—either voluntary or employer-paid—to help cover some of the gaps.

“We’ve seen a number of clients do an employer-paid critical illness benefit as a carrot to get [employees] to move toward the HSA program,” says Austin. These policies pay a lump sum if the insured is diagnosed with certain types of illnesses.

Another trend is wage-based cost sharing—with lower premiums, deductibles and out-of-pocket maximums for lower-income employees. In 2022, 40% of the large employers surveyed by the Business Group on Health offered wage-based cost sharing, says LuAnn Heinen, the group’s vice president.

Employers are providing more resources to help employees navigate their health care benefits and choose a plan during open enrollment, especially if they offer both low-deductible and high-deductible plans. Manion says some of these plan selection tools use artificial intelligence to look at employees’ claims data and help them select the best option based on their expected utilization. Others provide one-on-one support.

Employers can also provide tools to help employees make care decisions, especially if they’re paying a larger share of the cost with a high deductible. Employers are also expanding some cost-effective resources, such as virtual mental health benefits, which is a key area of focus.

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