DOL’s Proposed ‘PTE’ on Fiduciary Advice: Same Pig, Different Shade of Lipstick

What do you call an “exemption” that creates the “problem” it claims it is solving? It’s like the guy who waters the dirt road in front of his house every night so he can charge you $100 for hauling your car out of his mudhole the next day.

The Legacy of the Fifth Circuit Decision

We were all aware that there was a technical problem created when the Fifth Circuit, more than two years ago, in March 2018, vacated the Department of Labor (DOL)’s 2016 fiduciary rule package, including the best interest contract (BIC) prohibited transaction exemption (PTE). Some providers had “early adapted” to the (no longer applicable) fiduciary rule, taking on fiduciary status and relying on the (no longer available) BIC.

Those early adapters needed some sort of permanent relief.

Even more critically, plan sponsor fiduciaries desperately needed clear guidance as to what their responsibilities are with respect to, e.g., call center operators and conversations with participants about distributions.

As in other critical areas of fiduciary law, the absence of clear guidance from the DOL on what sponsor fiduciaries should do has and will continue to create the opportunity for plaintiffs’ lawyers to bring lawsuits against fiduciaries who—in an uncertain situation—are just trying to figure out what the right thing to do is.

All of that is incredibly unhealthy for our retirement savings system.

The newly proposed PTE fixes none of that.

A Regulation Disguised as a Preamble

Instead, the DOL is amending-by-novel-interpretation everyone’s long-held understanding of a 45-year-old regulation that spells out when an individual is giving “fiduciary advice,” a procedure known as the “five-part test.” Turning many providers into fiduciaries. Creating the problem the PTE purports to solve.

This approach, in effect, rejects the Fifth Circuit’s finding that the DOL had improperly “reinterpreted the 40-year-old term ‘investment advice fiduciary’” to create a new “comprehensive regulatory framework.” Frustrated by the courts, the DOL has simply done the exact same thing in a PTE.

DOL Has No Consistent View of Its Fiduciary Advice Regulation

The first thing that has to be said about this strategy is that it represents a massive flip-flop. The DOL is now claiming to find the substance of the fiduciary rule in the old advice regulation, even though it is on record, in preambles to proposals and to the final version of its fiduciary rule, saying that that regulation cannot be adapted to “solve” the problems the DOL wants to solve.

Here, among other things, is what this preamble does:

Advice as to rollovers is now investment advice.

The DOL is revoking the position it took in a 2005 Opinion Letter that “advice to roll assets out of a plan did not generally constitute investment advice.” This may be the most critical point in the entire PTE proposal. The “old” regulation—in which the DOL now finds everything it had thought, prior to the Fifth Circuit decision, it needed a new regulation for—provides that a person is not an “advice fiduciary” unless, among other things, that person is providing advice with respect to “the value of securities or other property, or makes recommendation as to the advisability of investing in, purchasing or selling securities or other property.”

Quite commonsensically, the DOL, in the 2005 letter, concluded that advice about a rollover was not advice about securities. In the PTE package, the DOL is, in effect by fiat, making that all go away.

The “regular basis” requirement can be satisfied after the money has left the plan.

The “old” regulation requires that to be “fiduciary advice,” the advice must be provided on a regular basis. This requirement presents a problem when you are asserting jurisdiction over the single act of advising a participant with respect to a rollover. Now, under the proposed PTE, a relationship after the participant leaves the plan can satisfy the “regular basis” test.

The “mutuality” requirement doesn’t require mutuality.

The “old” regulation requires that there be “a mutual agreement, arrangement or understanding, written or otherwise, between such person and the plan or a fiduciary with respect to the plan, that such services will serve as a primary basis for investment decisions with respect to plan assets.” For 45 years, providers have been addressing the issue of fiduciary status by disclaiming that what they say may be taken as such a mutual agreement.

Reversing that understanding, the DOL concludes that “it is more than reasonable … that the advice provider would anticipate that advice about rolling over plan assets would be ‘a primary basis for [those] investment decisions.’”

In the DOL’s view, “advice” by a financial institution about a rollover is going to be fiduciary advice. Regardless of what anybody says.

How Is Any of This Responsive to President Trump’s Executive Order?

On February 3, 2017, President Donald Trump instructed the DOL to reconsider the “economic and legal analysis” that it had used to justify its fiduciary rule. It has never done that.

Moreover, in the preamble to its proposed rule, the DOL claims that “This proposed exemption is expected to be an Executive Order (E.O.) 13771 deregulatory action.” It is inconceivable to me that whoever wrote that did so with a straight face. This is like the guy I mentioned at the top telling you he’s doing you a favor by only charging you $100 to haul you out of his mudhole.

What Is Really at Stake

The real question at issue here is whether retirement plan savers should be provided special rights and remedies vis a vis, e.g., brokers and financial institutions, that are not provided to non-retirement plan savers.

Individuals—regular investors and 401(k) participants alike—talk to brokers. The brokers say things to them about available investments. The Securities and Exchange Commission (SEC) sets the rules—very recently comprehensively revised—for how those conversations should proceed. And the individuals are perfectly free to ignore what the broker says.

The recently adopted SEC Regulation Best Interest (Reg BI)—indeed, much of it was modeled on the BIC—does a lot of what the DOL is doing here, but it doesn’t have a lot of teeth. On the other hand, the DOL is proposing that if individuals speaking to retirement plan participants don’t toe the DOL’s line, then they will be subject to (1) an excise tax (on a prohibited transaction) and (2) litigation under the Employee Retirement Income Security Act (ERISA)’s fiduciary rules.

Opening the door even wider for litigation against plan fiduciaries.

What Participants, Providers and Plan Sponsors Need

After the Fifth Circuit’s decision, the DOL had an obligation to clean up the mess that it had created with its failed fiduciary rule project by providing the providers who had “early adapted” to fiduciary status with relief. The appropriate relief would have been to allow those providers to opt out of fiduciary status and provide a simple PTE based on long-held fiduciary principles for those who did not.

The DOL has an obligation—especially in the context of widespread fiduciary litigation—to bring some clarity to the rules for plan fiduciary conduct.

And the DOL has an obligation—indeed, it was instructed by the president—to comprehensively, seriously and sincerely reconsider the financial analysis it undertook in 2015 to determine whether this strategy of “ERISA-izing” the participant rollover decision will actually lead to better outcomes.

None of that is in this new proposed PTE. Instead, the DOL has taken yet another shot at the fiduciary rule (in PTE disguise).

In defiance of the administration, the courts and a big chunk of Congress. Someone needs to put a stop to this immediately, in my humble opinion.

Michael Barry is president of O3 Plan Advisory Services LLC. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly at http://moneyvstime.com/ about retirement plan and policy issues.