Public Hearing Exposes Discord on QPAM Rule Implementation

A DOL public hearing held Thursday on the new QPAM Rule proposal highlighted concerns about foreign convictions and non-prosecution agreements as grounds for QPAM disqualification.

The Employee Benefits Security Administration hosted a public hearing Thursday to receive comments on its proposal to amend the qualified professional asset manager exemption.

A QPAM is an institution that handles transactions on behalf of a retirement plan with parties in interest, which would be barred if the retirement plan processed the transactions itself. A QPAM must be independent of both the plan and the parties in interest and act in the best interest of the plan, as well as other requirements.

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The proposal would expand the violations that could lead the Department of Labor to disqualify a QPAM to include foreign convictions for crimes that are “substantially equivalent” to U.S. offenses that would result in disqualification, as well as non-prosecution and deferred prosecution agreements for the same. It would also require the QPAM to indemnify clients for the cost of their disqualification and would allow for a year-long winding-down period for the disqualified QPAM to process previously-agreed-to transactions, but not any new transactions.

Allison Wielobob, the general counsel of the American Retirement Association, testified that these new rules will interrupt existing relationships and increase costs for plan sponsors and administrators, which would then be passed down to participants. Specifically, the indemnification requirement will force parties to renegotiate existing agreements, and QPAMs will have to account for this risk in their pricing, which participants will ultimately bear. She also argued that the year-long winding-down period is effectively no time at all, since it does not permit new transactions.

Robin Diamonte, the CIO at Raytheon Technologies and a Board Member of CIEBA, the Committee on Investment of Employee Benefit Assets, testified that plan sponsors rely on the QPAM exemption because it is not possible to keep track of thousands of parties in interest, so QPAMs are necessary to avoid violating ERISA transaction requirements. She also urged the DOL to allow fiduciaries to decide if a foreign conviction should be disqualifying, rather than the DOL itself.

Kevin Walsh, an attorney at Groom Law Group, expressed concern that malicious or opportunistic convictions in countries hostile to the U.S. could lead to disqualification of quality QPAMs and asked for a clearer framework on which convictions could lead to disqualification. He also discouraged a winding-down period which prohibits new transactions and said it “actively harms participants.”

In support of the regulation, James Henry, a global justice fellow and lecturer at Yale University, said that the DOL is not required to rubber-stamp bad-faith convictions in other jurisdictions.

Henry also said there is a large cost to under-regulating this industry and allowing bad actors convicted abroad to be QPAMs in the US. He cited the fraud violations of Credit Suisse, a Swiss bank, in Mozambique, and says the new proposal would have made it easier to disqualify them in the U.S., since they were able to settle with the DOJ without a criminal conviction.

Walsh argued that the DOL should not rely on unwritten rules for foreign convictions, and if it truly intends to exclude bad-faith foreign crimes, then it should re-propose the rule with a provision to that effect. He cites as an example Russia convicting a U.S. bank for a crime to retaliate against the U.S. for its foreign policy relating to the war in Ukraine.

Tim Hauser, the head of program operations at the EBSA, responded to the concern about malicious convictions abroad and said he had never seen the hypothetical that Walsh was describing and that the foreign convictions they are interested in are related to genuine corrupt practices. Walsh responded that this is based on DOL’s discretion and is not spelled out in the proposal itself.

Kent Mason, a partner at Davis & Harman LLP, proposed an alternative in which QPAMs convicted of a foreign offense or who enter into a non-prosecution agreement merely have to disclose that to their clients instead of being automatically disqualified. This proposal was not explicitly responded to by representatives of DOL during the hearing.

The comment period will remain open until December 16.

State-Sponsored IRA Plans Have Potential to Boost Worker Savings

An issue brief from Rice University finds state-sponsored retirement plans are still works in progress.

State-sponsored retirement plans may help workers save more for retirement and help retirees rely less on social services, if their cost effectiveness is not impaired by fees, argues retirement research from Rice University.

An issue brief from Rice University’s Baker Institute for Public Policy examined state efforts to expand retirement plan coverage for workers who do not have access to retirement benefits from their employer, concluding that state plans are worth exploring but have not yet disproved their critics.

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The brief, Considerations for State-Sponsored Retirement Plans, written by Joyce Beebe, a research fellow in public finance at Rice, notes that a Federal Reserve study of U.S. workers in 2021 found 25% had no retirement savings and 40% felt behind on preparing for retirement.

State-sponsored individual retirement account programs deduct regular retirement plan contributions from an employee’s paycheck.

Beebe concludes that, despite criticisms, state-administered plans should not be abandoned and because the programs are still relatively new, need time to allow them to mature before their success can be determined, explains Beebe.   

“Overall, the debate will be settled as new state programs are implemented and more data becomes available,” she writes. “The success of the programs will largely depend on whether they can react a certain scale, and more importantly, whether workers remain savers in the long run.”

Data Beebe cites from the three oldest and largest state plans—California, Illinois and Oregon—finds that, despite account withdrawals, each state program continues to receive deposits.

No Federal Mandate

While the federal government encourages businesses to provide retirement plans to employees, no federal mandate requires them.

Research from the American Association of Retired Persons finds that 48% of U.S. workers—57 million people—do not have access to an employer-sponsored retirement plan. AARP data shows that employers at small businesses are less likely to have a retirement plan and that access differs substantially by race, ethnicity and gender.

“Many smaller employers cite costs and administrative burdens as primary reasons for not offering retirement plans,” writes Beebe. “As such, supporters of state plans believe the plans are especially beneficial for small-business employees. Part-time workers and those in the sharing economy also stand to benefit if states decide to include them in their retirement programs.”

States Respond

Several U.S. states have responded to the gap in retirement plan availability by creating programs for workers without access to one through their employers. As of mid-2022, 12 states either passed laws or implemented plans to offer IRA programs to workers without a retirement benefit from their employer, according to Beebe.

Data from a research center in Georgetown University’s McCourt School of Public Policy, the Center for Retirement Initiatives, which tracks state plans, counts 18 total programs (16 states and two cities) in various stages of development. The goal is that, among other benefits, state plans will help individuals lessen their reliance on social services in retirement.

“If a significant number of retirees are unable to support themselves, there will be significant pressure on the public safety net, and current workers will ultimately bear the costs,” Beebe writes.

With state-level retirement plan boards overseeing the programs, employers do not have any fiduciary duty to the retirement plans. They simply act as conduits to channel funds from workers to plans and encourage employees to participate, Beebe says. This also leads to a change in fee structure.

“Because of the frequent withdrawals and relatively small balances, administration costs are usually high,” Beebe writes. “There are also separate fees charged by the state.”

When it comes to fees, Beebe explains that any investor can access an IRA independently, yet for workers contributing to state-sponsored plans, the state’s involvement partnership with a finance industry provider comes with higher fees, Beebe explains.

“Anyone can have access to IRAs, even if your employer does not offer any retirement plans; but if you do it-yourself, you only pay for a company like Vanguard or Fidelity to manage the assets,” Beebe said. “If you go through the state, you pay extra fees.”

Information collected and published by Investopedia in August 2022 shows that fees for Roth IRAs can include account maintenance and advisory fees, transaction fees and commissions and fees for going under a minimum balance. The fees vary by provider but can range from zero up to 0.90% or more annually.

An analysis by the Pew Charitable Trust, State Auto-IRAs Continue to Complement Private Market for Retirement Plans, finds “little evidence that state initiatives crowd out employer plans,” writes Beebe. “On the contrary, some employers would rather start their own plans instead of using state-mandated plans.”

Finally, Beebe addresses if state plans can provide workers with meaningful retirement savings—considering the costs for managing many small accounts and for monitoring frequent withdrawals—by inspecting the three largest state-sponsored IRA programs with the longest operating histories.

CalSavers, OregonSaves and Secure Choice (Illinois) were selected because the state programs “demonstrate similar patterns in terms of account balance and withdrawal frequency,” writes Beebe.

California

The largest state plan is the California CalSavers program, with $273 million in assets, 331,000 funded accounts and more than 106,000 employers. CalSavers began in 2019. As of September 30, the average account has a balance of $756 and a monthly contribution of $166, data shows.

While 67,323 accounts have experienced full withdrawals, another 11,591 accounts experienced partial withdrawals, and the opt-out rate for the program is about 37%, according to the data.

The total fee for CalSavers ranges from 0.825% to 0.95% because it includes a state fee of 0.05%, a program administration fee of 0.75% and an investment funds fee that ranges from 0.025% to 0.15%, Beebe explains. State rules require expenses to not exceed 1% of program funds.

Oregon

OregonSaves was launched in 2017, and as of August 31, the program managed 114,484 accounts and $157 million in assets, according to data from the Oregon State Treasurer.

The average contribution amount to OregonSaves was nearly $177 per month and the average account balance $1,369. Almost 25% of eligible participants opted out of the program and among the 114,484 funded accounts, 30,073 or 25% have had least one withdrawal.

In August alone, $7.4 million was deposited into the accounts and $3.5 million was withdrawn. Based on the average account balance of $1,369, the account fee is about 1.3% for an average account holder and such, the total fee is for workers is approximately 1.55%.

Illinois

The Illinois Secure Choice Program began in 2018. As of September 30, Illinois reported $84 million of assets in 109,346 accounts, an average contribution of about $144 per month and the average account balance was $768, data shows. The opt-out for the program was about 32%. Among all accounts, 24% have at least one withdrawal. In September alone, participants contributed $3.8 million and withdrew almost $1 million, the data shows.

The Illinois program charges participants three types of fees: The state fee, the program administration fee, and the underlying investment fund fee, according to state treasury data.

For the most recent plan year, the state fee was 0.05% of net assets, the program administration fee was 0.61%, and the investment fund fees was 0.09%. The total fee for the state-sponsored IRA was therefore 0.75%, data shows.

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