Compliance September 1, 2023

Congressional Republicans Oppose DOL Proposal of New Fiduciary Rule

A notice of rulemaking has not been issued yet, but Republican leaders are already discouraging the Department of Labor from proposing a new fiduciary rule.

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Representative Virginia Foxx, R-Virginia, and Senator Bill Cassidy, R-Louisiana, published on Thursday a public letter to Julie Su, the acting director of the Department of Labor, discouraging the department from proposing a revised 3(21) fiduciary rule.

Foxx serves as the chair of the House Committee on Education and the Workforce, and Cassidy as the ranking member for the Senate Committee on Health, Education, Labor and Pensions.

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The letter criticized the DOL for creating confusion and excessive compliance costs by revisiting 3(21) fiduciary standards too frequently: “Over the last two years, the Department has espoused at least three separate positions on what it means to be an investment advice fiduciary. By failing to articulate itself consistently, the Department has created unnecessary instability for retirement plans, retirees, and savers.”

The legislators also referenced the 2016 fiduciary rule vacated by a decision from the 5th U.S. Circuit Court of Appeals in 2018. The 2016 rule would have defined advisers who recommend a plan for an individual retirement account rollover as ERISA fiduciaries. The rule was voided by the 5th Circuit on the grounds that rollovers are not normally part of an ongoing or continuing advisory relationship. The advice is typically given only once and not on a “regular basis.”

In the letter, the policymakers recommend that the DOL focus its resources instead on implementing the regulatory agenda proscribed in the SECURE 2.0 Act of 2022. Updating the fiduciary rule again would only create unnecessary uncertainty for fiduciary advisers and damage Americans’ retirement savings, Foxx and Cassidy argued.

The DOL has not given any sign that it will halt in amending the 3(21) rule. It previously wrote that a proposed amendment with “additional protections” would “deliver substantial gains for retirement investors and economic benefits that more than justify the costs” of the regulation.

The department published its Spring Regulatory Agenda in June and set August as a self-imposed deadline for proposing a new rule. That deadline has come and gone, but regulatory agendas often hold more aspirational or check-the-box value than serving as an actual timetable.

Investing September 1, 2023

DCIIA Provides QDIA Selection Advice to Plan Sponsors

Plan sponsors should consider their participants’ retirement income needs, ease of use, personalization and cost when evaluating qualified default investment alternatives. 

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More defined contribution plan sponsors are, of late, looking to not only help participants save to retirement, but also continue saving through retirement. To meet this additional objective, qualified default investment alternatives are also evolving. 

The Defined Contribution Institutional Investment Association recently published an “action kit” for plan sponsors, as well as service providers and advisers, to follow when selecting the best QDIA for their plan. 

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Since the Pension Protection Act of 2006, DCIIA found that QDIAs have become the largest asset gatherers in most defined contribution plans. Target-date funds, the most popular, are offered by more than 86% of plans, but there are an array of options that plan sponsors can take advantage of, and tailoring them to specific participants’ retirement needs could be a big help. 

When selecting a QDIA, DCIIA identified four main themes to consider: 

  1. Participant objectives and outcomes through accumulation and decumulation phases; 
  2. Ease of use for participants; 
  3. Personalization at the plan and individual level; and 
  4. Cost under continued downward pressure. 

        DCIIA characterized off-the-shelf target-date funds as easy to use, a low-cost solution and easy to implement, as they are very widely used. Managed accounts offer more personalization but typically cost more and require participant engagement to provide data beyond what is automatically collected.  

        Other emerging options, such as a hybrid or dynamic QDIA and personalized TDFs, are relatively low cost and can offer more personalization than a standard TDF. Managed accounts with a retirement income component are also an emerging option that offer personalized portfolios using automatically collected and participant-provided data. However, these tend to come at a higher cost. 

        Plan sponsors can also consider TDF solutions with a retirement income component, as these tend to have a lower cost than a managed account, but they are less personalized and are age-based. They do offer the option to tailor a retirement income stream, and spending, to individual participants, DCIIA highlighted. 

        DCIIA also came up with several questions that plan sponsors can ask themselves when evaluating their QDIA options.  

        For example, plan sponsors should consider how retirement-ready their participants are: Are they on track? Does it vary by demographic? What do the participants’ allocations look like? 

        Employers can also consider if the QDIA should have an embedded annuity at retirement as a potential way to provide guaranteed lifetime income. 

        A recent Alliance Bernstein report found that incorporating lifetime income into a QDIA also keeps assets within a plan, and as a result, this might give the plan more leverage to negotiate with providers than an individual would have on their own. 

        If a plan sponsor wants to provide a retirement income option in the QDIA, the sponsor should consider how retiree-friendly the plan is and how easy it is for retirees to use. Plan sponsors should also ask themselves how satisfied overall their participants are with the plan’s current default offering and if people are asking for additional features, according to DCIIA. 

        When thinking about personalization, DCIIA suggested that plan sponsors evaluate what participant data points are available and were utilized in the portfolio construction of the QDIA. They should also consider that a provider of personalized solutions could retrieve data from the plan sponsor’s recordkeeper to avoid the need for participant engagement with the QDIA. 

        Lastly, in terms of cost, DCIIA’s action kit recommended that plan sponsors consider if the sponsor would have an appetite for a higher-cost QDIA option if it potentially delivered better outcomes across demographics and served as a catalyst to engage more participants.  

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