Opinions July 5, 2018

Saxon Angle: The Final Chapter

The 5th Circuit officially vacates the fiduciary rule.
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On June 21, the U.S. Court of Appeals for the 5th Circuit issued its mandate officially vacating in toto the Department of Labor (DOL)’s 2016 fiduciary rule, including the best interest contract or “BIC” exemption, along with the DOL’s other related 2016 prohibited transaction exemptions (PTEs). The mandate is the final chapter in the department’s fiduciary rule saga and follows the 5th Circuit’s March 15th judgment in U.S. Chamber of Commerce v. DOL, where the court held that the fiduciary rule was invalidly promulgated. The following provides some background of the decision and what can be expected going forward.

The Decision
The March 15th decision was sweeping in scope and represented a resounding defeat for the DOL. The court determined that the fiduciary rule conflicted with the statutory text of Section 3(21)(A)(ii) of the Employee Retirement Income Security Act (ERISA)—and with the counterpart provision in the Internal Revenue Code of 1986 (IRC)—which assigns fiduciary status to persons who render investment advice for a fee or other compensation or have any authority or responsibility to do so.

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The decision examined the common law meaning of the word “fiduciary,” which, in the court’s view, required a relationship of trust and confidence. The court ruled that, by attempting to broadly expand the universe of persons to whom fiduciary status is assigned to include ordinary salespersons, such as stockbrokers and insurance agents, the rule “fatally conflicts with the statutory text.”

The court also reasoned that, even if one were to assume for the sake of argument that the rule did not conflict with ERISA and the IRC, it nonetheless failed to meet the “reasonableness” requirements of the U.S. Administrative Procedures Act and those under the U.S. Supreme Court’s Chevron doctrine.

The court found that the fiduciary rule was unreasonable for numerous reasons, including for infringing on “SEC [Securities and Exchange Commission] turf”—i.e., the regulation of broker/dealer (B/D) sales practices and compensation—in a manner that undercuts Congress’ Dodd–Frank instruction to the SEC not to prohibit commission-based compensation. In this regard, the court expressed the view that “[r]ather than infringing on SEC turf, DOL ought to have deferred to Congress’ very specific Dodd–Frank delegations and conferred with and supported SEC practices to assist IRA [individual retirement account] and all other individual investors.”

The court concluded that the fiduciary rule bears all of the hallmarks of an unreasonable regulation and an arbitrary and capricious exercise of administrative power.

Next Steps
The court’s issuance of the mandate finalizes the legal battle over the fiduciary rule, as the deadline for a party to request that the Supreme Court take the case lapsed after June 13. What this means is that the “five-part test” from 1975 has sprung back to life, and Advisory Opinion 2005-23A—the Deseret Opinion—has likely been restored. Over the past three months, plan service providers have prepared for this shift, which largely brings about a restoration of the pre-fiduciary rule legal structure. That being said, regulators at both the state and federal level are paying closer attention to the retirement space.

In the short term, many financial institutions that had relied on the transition portion of the BIC exemption are considering their next steps. One option being considered is to retreat from fiduciary status. A second alternative is reliance on Field Assistance Bulletin (FAB) 2018-02. Under the FAB, the DOL has taken the position that, until regulations, exemptions or other administrative guidance have been issued, it will not pursue prohibited transaction claims against fiduciaries “who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted” had the rule and related exemptions not been struck down.

Looking further ahead, the retirement industry will likely need to further engage with regulators. The SEC recently proposed rules that would cover it; therefore, the industry will need to be active in figuring out whether these regulations are workable.

Separately, financial institutions that achieved BIC exemption compliance may seek new exemptions that provide prohibited transaction relief for advice fiduciaries. Finally, consumer groups will likely continue to push for additional consumer protection regulations at both the state and federal levels. When there is a change in administration, it is possible that legislation or new regulatory efforts could commence.

While the seas have yet to settle on the fiduciary debate, plan sponsors should continue to follow developments in this area and how their service providers react to the change.

Stephen Saxon is a partner with Groom Law Group, Chartered, in Washington, D.C. George Sepsakos is an associate with Groom. 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Strategic Insight or its affiliates.
Benefits July 3, 2018

Questions to Ask Health Benefits Brokers to Make Sure the Price Is Right

Dave Chase, co-founder of Health Rosetta, says three questions address three big problems in health care: pricing failure, overtreatment and a crazy amount of administrative burden.

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Just as in retirement plans, in the health benefits market there can be conflicts-of-interests between providers that drive up costs for employers and employees and result in decisions being made that are not in the best interest of participants.

Seattle-based Dave Chase, co-founder of Health Rosetta, which promotes reform for the U.S. health care system, says there are three questions employers should be asking their health benefits brokers or advisers. The firm’s website claims, “We help public & private employers and unions provide better care for 157 million Americans while reducing health benefits spending by 20-40%.”

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Chase says if employers ask, “What kind of commissions and bonuses do you receive from carriers, in total?” they will learn what kind of incentives are driving broker and adviser underlying decisions. Employers will learn whether recommendations are driven heavily by those relationships. Chase says there is a lack of disclosure in the health benefits market.

“On the fully insured side, the more clients a broker gets, the more they get paid,” Chase explains. “On self-insured side, brokers will often get paid a very substantial bonus payment based on retention of a book of employers with a particular carrier. For example if a broker retains 90% of clients for particular plan, he or she can get a 20% or so bonus, so the broker is not going to shop around. Who pays you determines who you work for. If a broker positions himself as a buyer’s agent but acts as a seller’s agent, this creates all kinds of problems”

According to Chase, Health Rosetta offers a disclosure form and has found up to 70% of undisclosed revenue streams plan sponsors are not aware of. The firm has also found that if the spread between regular inflation and health cost inflation had been invested in the market over the course of their careers, Baby Boomers would have $1 million more in retirement savings.

He adds that if a broker won’t answer this question, it is a massive red flag. “Why would you work with someone who won’t disclose what they get paid? If they can’t fully disclose compensation, they are likely getting paid too much,” he says.

If an employer asks, “Is more than half your compensation coming from one specific carrier?” it can find out if the broker is less likely to shop around for the best deal. Chase explains that typically the way such a relationship works is that a carrier can fire the broker with only 30-days-notice if he or she is not selling well for that carrier. Such a relationship means the broker is not acting in the best interest of the health benefits sponsor.

Finally, Chase suggests employers ask benefit brokers, “What’s your method to shop the market and find the best offer available?” He says that rather than always building off of what they did last year, good business practice for a health benefits broker is to start from the ground up and determine the proper foundational components of the plan and search on that. Brokers should not say, “We have this carrier that may be able to accommodate the right plan for your employees.”

Employers should strive for a transparent broker relationship, high performance plan design, and a good administrator of benefits. One thing Chase says needs to be addressed is primary care. “Many plans have band aids meant to address that—urgent care, nurse call lines, etc. If they offered proper primary care, those things are unnecessary,” he says.

If the broker finds a better plan for the employer, Chase suggests that the most successful way to introduce it to employees is not to take away the old underperforming plan. Add the new plan, and over a three-year period or so, as word of mouth spreads, more employees will join the good plan.

“It’s about addressing three big problems in health care: pricing failure—no correlation between what employers and employees pay and are they get—overtreatment—no value-based care—and a crazy amount of administrative burden,” Chase says. “These questions address these extremely well. Transparent, open networks tackle the pricing failure problem. In the old preferred provider organization (PPO) environment, there was a good insurance carrier and employers and employees paid for that. Now they are spending more for less.”

Concerning overtreatment, Chase says having proper primary care addresses this. “Today most plans ration choices. For example, if an employee has lower back pain, a very common problem, they are told there’s a pill that will fix that. So much care is non-evidence based. But proper primary care will say, ‘Here are the different options and here is what works best the majority of the time’” Chase explains

He adds that an open, transparent network gets rid of middle men and enhances primary care which reduces administrative burdens.

“There’s a lot of talk about evidence-based medicine. We are trying to make the case for evidence-based health purchases. We scour the country for those paying less and getting more—the opposite of what most employers and employees are getting today,” Chase says.

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