Compliance January 12, 2024

American Securities Association Wants DOL Employees Recused From Work on Fiduciary Proposal

The ASA requested that Congress identify and consider removing from the project certain DOL staff involved with the proposal.

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The American Securities Association wrote a letter on Wednesday to the U.S. House Committee on Financial Services Subcommittee on Capital Markets calling on the subcommittee to identify Department of Labor staff involved with the creation of fiduciary proposal, sometimes called the retirement security proposal. This request drew condemnation from Phyllis Borzi, a former assistant secretary of Labor.

The letter asks that the subcommittee “request that the DOL identify, with specificity, the career employees who have been involved, directly or indirectly, in this policy initiative over the last decade. Evaluate whether these individuals are acting in the best interest of the American people and what outside influences may be informing their actions. Evaluate whether these people should be recused from working on this issue, including finalizing the current rule and any releated [sic] lawsuits.”

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The retirement security proposal would extend fiduciary duty under the Employee Retirement Income Security Act to certain one-time transactions, such as rollovers and annuity sales. The DOL has been trying to regulate on this issue for many years, as the letter says, and one final rule, similar to the current proposal, was vacated by the 5th U.S. Circuit Court of Appeals in 2018.

The ASA’s letter argues that the DOL has wasted considerable public resources in pursuing this rulemaking despite previous setbacks and that “American taxpayer dollars continue to be spent on policy initiatives that the courts have repeatedly deemed illegal.”

Borzi, a former assistant secretary of labor from 2009 to 2017, said of this letter that, “to my knowledge, no one has ever before made such a shocking or dangerous recommendation to publicly target career employees (and “out” them by name so that they become targets for abuse) for simply doing their jobs.  Obviously this is yet another not so subtle attempt to shut down a policy process that would help protect investors by mitigating losses they experience from conflicted investment advice just because these financial institutions prefer the status quo.”

Borzi added that, “if this advice to Congress is an indication of the type of mean-spirited thought process that goes into the recommendations that the members of this organization provide to their clients, we need far more than the DOL proposed regulation to protect investors from harmful advice.”

Michael Kreps, a principal in the Groom Law Group who previously served as a senior counsel for the Senate Committee on Health, Education, Labor and Pensions, says he had never seen a letter to Congress with this sort of request in it before. “I don’t recall seeing that kind of argument before, but I also can’t think of a rulemaking in the retirement space that is so controversial and has so much history.”

The DOL declined to comment, and the ASA had no further comment beyond the letter.

Compliance January 12, 2024

IRS Takes On SECURE 2.0 Emergency Savings Accounts

The notice outlines methods sponsors may not use to counter the abuse of sidecar account matching contributions, instead asking for suggestions on how to limit abuse.

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The IRS issued initial guidance on pension-linked emergency savings accounts as provided for in the SECURE 2.0 Act of 2022 and active as of 2024.

The guidance is not comprehensive and focuses on the anti-abuse and manipulation methods a sponsor can adopt to prevent participants from contributing to a PLESA solely for the purpose of gaining an employee match into their retirement account before withdrawing their own contributions.

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Inspired in part by the COVID-19 pandemic and people’s need for emergency savings, SECURE 2.0 provided for PLESAs, sometimes called sidecar accounts, that are tied to a defined contribution plan but have more flexible withdrawal rules. If a sponsor elects to create such an account, it must permit its participants to withdraw from the account at least once per month, and such withdrawal does not bring a 10% penalty.

A PLESA is a Roth account, and contributions to it must cease when its balance reaches $2,500, though appreciation on the assets therein may carry the balance over $2,500. The feature is not available to highly-compensated employees, those making more than $155,000 for 2024.

The IRS notice pointed out that if an employer offers a match, then participant contributions to the PLESA also trigger a match to the retirement account. This created some concerns that some participants would abuse this structure.

The notice explained that sponsors are not required to check against abuse of this kind but are permitted to do so. The IRS laid this out rather explicitly in the guidance, writing: “A plan sponsor may consider a participant as not manipulating the matching contribution rules if the participant made a $2,500 contribution in one year, received the matching contribution on such amount, and then took $2,500 in distributions that year and repeated that pattern in subsequent years.”

The IRS listed potential enforcement techniques that the IRS deems unreasonable and not allowed:

  • Sponsors may not forfeit a matching contribution already made to a retirement account on the basis of a previous ESA participant contribution;
  • Sponsors may not suspend the ability of a participant to contribute to the PLESA on their own; and
  • Sponsors may not suspend matching contributions made in relation to participant contributions to their retirement account.

The IRS noted that current law permits plans to limit matches made in relation to PLESA contributions as a way to mitigate abuse. Beyond that, the IRS did not list reasonable measures that sponsors could take, instead soliciting public comment on the matter.

The IRS will accept those comments suggesting reasonable methods of limiting PLESA abuse until April 5.

When making suggestions, the IRS encourages commenters to keep the following in mind: “A reasonable anti-abuse procedure is one that balances the interests of participants in using the PLESA for its intended purpose with the interests of plan sponsors in preventing manipulation of the plan’s matching contribution rules.”

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