ERISA 40th Anniversary: Time for an Update?

Bradford Campbell, counsel at Drinker Biddle & Reath LLP and a former Assistant Secretary of Labor for the Department of Labor’s Employee Benefits Security Administration (2007 – 2009), points to Section 406 of ERISA as the part of the landmark benefits law perhaps most in need of change. The section establishes a long list of prohibited transactions and other restrictions meant to prevent conflicts of interest among fiduciaries and investment service providers working with tax-advantaged workplace retirement plans.

Campbell contends the intention behind Section 406 is a good one—preventing retirement plan participants from receiving biased or unsuitable advice from investment providers looking to increase their own level of compensation. Yet the current level of restriction “makes the perfect the enemy of the good,” Campbell says, and may be doing more harm than good overall for workplace retirement savers by preventing widespread access to investment advice.

“This notion that there should be no conflicts of interests at all in the retirement planning space is preventing most participants from getting investment advice directly through their plans,” Campbell explains. “And it’s complicating the question of how participants are being advised on the back end of the savings effort, when they are rolling over to individual retirement accounts or deciding to remain in plan.”

Indeed, Campbell says the DOL’s own analysis “shows literally tens of billions of dollars a year in investment errors that are going uncorrected because of a lack of available advice.”

“I think wider availability of advice would really help these people,” Campbell adds. “I’m talking about the folks who are highly concentrated in their own employer’s securities, people who have never rebalanced their portfolios in decades and therefore have very age-inappropriate asset allocations. This is a real problem and it’s a drag on people’s retirement readiness and the overall performance of the system.”

Campbell says most participants don’t get investment advice because the service providers who are best positioned to provide advice (i.e. those directly serving the plan with investment products) aren’t allowed to provide advice under current rules. The prohibited transaction rules cause a similar problem with IRA rollover advice, he says.

“We’ve tinkered around the edges with this—participants are getting some advice if the plan hires a truly independent adviser separate from the investment provider,” Campbell explains. “Also, there are ways through the Sun America Opinion to have computer-generated advice within the plan. And there are some ways through the Pension Protection Act (PPA) to provide advice on a level compensation basis.”

But these remedies have been assembled piecemeal, Campbell says, and they do not do enough to ensure those who want and need advice in the workplace retirement planning context will be able to access such advice.

Campbell says the Pension Protection Act of 2006 “did some big things around auto-enrollment and default investment options that have improved the system quite a bit. But the reality is that ERISA predates wide adoption of the defined contribution system. So another area, now that we’ve done a lot of work on the front end of getting people into the system, is on the back end—how do we get people out of the system efficiently?” 

Campbell says this is another phase where ERISA Section 406 may be doing more harm than good when considered overall. “As the system matures we really need to take another hard look at rollover advice, and at the various ways of providing annuities or withdrawal strategies within the plan,” he adds. “We need better ways to help people figure out how to use the money they’ve accumulated to achieve a stable lifetime income in retirement. Advice is going to play an important role there.”

One sign that is encouraging, Campbell says, is that there is a lot of product development going on among plans and service providers aimed at solving the “decumulation” question, which should in turn prompt a closer look from the DOL. Plus, the department has included an in-plan annuity regulation on its regulatory agenda.

“Some of the things the DOL is working on in this area are going to help,” he adds. “For example, the department has indicated it is hoping to improve the safe harbor for plan sponsors selecting an annuity provider within a DC plan. It’s on the regulatory agenda for next year—to come out with a better regulation there will help a lot of participants on the income question.”

But still, the important challenge as we enter the fifth decade of ERISA oversight remains access to advice, Campbell says. He notes that the deadlock in Congress may not be a problem when it comes to updating key sections of ERISA.

“Congress has given the department the ability to create exemptions to the prohibited transaction rules in ERISA if it determines the exemption is in the best interest of participants,” he explains. “There has been a philosophical debate for years in the DOL on all this. Folks like myself believe the potential for abuse by the service providers under new prohibited transaction exemptions—so long as they are crafted effectively—would be sufficiently small so that the overall benefit would really dwarf the impact of any bad actors.”

Campbell says the current leadership in the DOL, appointed by President Obama, has a different view of the danger of cutting back on prohibited transactions. In short they are far more skeptical of the intentions and trustworthiness of investment service providers. “By way of full disclosure, during the end of my time at the DOL we had a regulation to try to do some of the things we’re talking about, to make advice more available, which they prevented from moving forward,” he says. “Many of the signs these days point to a tightening of advice standards, unfortunately.”

And what about the DOL’s longstanding effort to draft and implement a wider fiduciary definition? Campbell says service providers’ fear that such a redefinition will cut back even further on the advice they can provide directly to plan participants is a valid one—but an expanded fiduciary definition need not further limit the availability of advice for plan participants, depending on how it is enacted. 

“This administration clearly wants to expand the list of service providers who are going to be considered fiduciaries,” he explains. “And part and parcel of that, therefore, is how the transaction rules apply. When you are a fiduciary, the prohibited transaction rules apply to you in a way they don’t when you are not. So, that said, the effect of what the administration wants to do, without additional exemptions, would be to exacerbate a lot of these concerns.”

However, Campbell hopes a revision to Section 406 would solve a lot of the worries that have caused such lengthy delays and heated debate around the DOL’s fiduciary redefinition effort.

“So in other words, whether they expand who is a fiduciary or not, the lack-of-advice problems could still be addressed by adding more exemptions to Section 406,” Campbell says. “If they take away with both hands—by adding more fiduciaries and refusing to add to the list of prohibited transaction exemptions—it’s a problem. But if they take away with one and give with the other—perhaps making more brokers into fiduciaries but allowing more leeway for these brokers and other parties to give advice and direction to plan participants—that could be a favorable result for everyone.”

Unfortunately it looks like the DOL may continue making the perfect the enemy of the good, Campbell says.

“The Obama administration has taken the stance that all conflict must be prohibited rather than mitigated,” he says. “Frankly I don’t hold out a lot of hope that their effort on the new fiduciary rule will help these issues we are talking about. 

“We’ve seen a lot of recognition in Congress and the industry that where the DOL originally wanted to go on the new prohibited transaction rules was going to make some things worse,” Campbell adds. “My hope is that, when they come through with a new proposal, either they will reflect some of this criticism, or they will start a new debate that will lead to changes. That’s a fight we’re going to be getting into next year.”