December 17, 2014

DOL 2014 Fall Regulatory Agenda

By Fred Reish, Bruce L. Ashton , Bradford P. Campbell, Joan M. Neri and Joshua J. Waldbeser


The Department of Labor has released the 2014 Fall Regulatory Agenda. The updated agenda provides the anticipated publication dates for the next steps in the regulatory process for nearly a dozen ERISA items.  This bulletin discusses the agenda for the retirement plan projects that we believe are most important to plan sponsors and service providers.

Key Agenda Items

The “Conflict of Interest Rule.”   This is the current name for a proposal to re-define fiduciary investment advice.  The agenda continues to show January of 2015 as the date for the release of a new Notice of Proposed Rule Making (NPRM, which is more commonly known as a proposed regulation)..  Interestingly, this is the only DOL agenda item for which the publication date was not delayed. 

Since the stated release date is only about a month away, we believe that the January deadline is likely not to be met.  The NPRM must first be cleared by the Office of Management and Budget (OMB) (a process that usually takes the better part of 90 days), and the DOL has not yet officially sent the regulation to OMB for review. 

That said, there is a small chance that the rule is receiving special treatment.  It is possible that the rule has been “pre-cleared” by the White House behind the scenes, reducing the time needed for the OMB review.  On balance, however, we are going to stick by our projection that the January deadline is aspirational rather than probable. However, we do expect that the proposed regulation will be released in the first part of the year.

Once the NPRM is released, there will be a public comment period, during which we anticipate a robust response from the financial services sector. We don’t expect that a final regulation will become effective until some point in 2016.

Anticipated Impact on Plan Sponsors

As we see it, this regulation will have little or no direct impact on plan sponsors, in that it will not require them to adopt changes in how they manage their plans or investments. The biggest impact of the regulation will likely be to impose fiduciary status on certain service providers whose roles and responsibilities were not previously considered to be fiduciary in nature, such as some financial advisors to plans. This expansion of fiduciary status would presumably be intended by the DOL to be beneficial to plan sponsors, by holding the affected providers to a higher standard of conduct and prohibiting certain practices which involve conflicts of interest.


Anticipated Impact on Service Providers

The larger impact will be on service providers that fall under an expanded definition of fiduciary. For RIAs, this will not be a change, because most RIAs already are ERISA fiduciaries. We also don’t anticipate a change in status for most recordkeepers or third party administrators, as they typically do not give investment advice. For recordkeepers in particular, if the re-proposed rule contains provisions similar to the original, there will be a “platform exception” which will clarify that recordkeepers are not fiduciaries solely because they maintain a platform of investments for 401(k) plans.

For broker-dealers and their registered representatives (sometimes called “financial advisors”), however, the impact may be significant, because many broker-dealers have taken the position that their financial advisors are not providing investment advice and, thus, are not fiduciaries. Adoption of an expanded definition will likely affect both the status for broker-dealers as fiduciaries and their compensation (due to the fiduciary prohibited transaction rules of ERISA). In response, these broker-dealers may need to develop RIA fiduciary programs for advisors who focus on retirement plans and decide how to manage the plan business of those who do not. (We are aware of a number of firms that have already created such programs, presumably in anticipation of the possible rule change.)

We also anticipate that the regulation will have a significant impact on advisors who make recommendations about participant distributions and rollovers to IRAs, as well as on compensation for advisors giving advice to IRAs. It is our understanding that the proposal will include new rules related to distributions, rollovers and IRA investment advice (including new prohibited transaction exemptions related to advising participants once their money has been rolled to IRAs). While we don’t know what those new rules will say, we suspect that they will increase regulation over the distribution and rollover processes and advisory services to IRAs.

Brokerage Windows. With regard to its inquiry into brokerage windows, the DOL simply noted that November 19th was the end of the comment period on its request for information (RFI). Presumably, the DOL staff will review the comments to see if regulatory or guidance projects should be developed. We assume that it will take at least three to four months before anything is said. If and when additional guidance is released, we will provide a discussion of the guidance and an evaluation of the impact.

Anticipated Impact on Plan Sponsors

It seems likely that the DOL will take some action. The guidance may be in the form of information releases, field assistance bulletins or other “soft” guidance rather than regulations. Whatever the form, we believe that, at a minimum, the DOL will clarify and possibly reaffirm the obligation of plan sponsors to prudently select and monitor the brokerage account provider. We also suspect that the DOL is concerned that service providers and plan sponsors are not making the participant disclosures required under current guidance, and that it may emphasize this obligation, possibly expanding the scope of required disclosures.

It is also possible that the DOL could require that all plans provide a core lineup of designated investment alternatives that are selected and monitored by plan fiduciaries rather than offering a “brokerage window only” plan to participants. (These “brokerage window only” arrangements are not common and are found only in small plans). Short of an absolute requirement, the DOL could also encourage those plans to provide a core lineup to their participants is by providing, for example, that plan fiduciaries are not able to avail themselves of the ERISA 404(c) fiduciary protection for participant investment decisions unless the plan offers a core lineup.

While the DOL’s position is that plan sponsors must prudently select and monitor all plan service providers, including brokerage window provider – and that covered service providers must make 408(b)(2) disclosures regarding their services, compensation and fiduciary status – some sponsors and providers may not be aware of these requirements. If the DOL addresses these issues, hopefully, it will provide additional guidance on how plans should comply with the requirements for brokerage windows.

One issue we will be on the lookout for is whether the DOL imposes an obligation on fiduciaries to monitor the investments in a brokerage account. We do not expect to see such a requirement, but it previously adopted that position (which it quickly withdrew, in response to industry criticism) in releasing Field Assistance Bulletin 2012-02 on participant disclosures.


Anticipated Impact on Service Providers

The investments in brokerage accounts are often reported as “other” assets on the Form 5500. If guidance is issued that changes this requirement, recordkeepers will need to obtain copies of brokerage account information and modify their systems in order to report the investments. While the legal obligation will fall on plan sponsors, as a practical matter recordkeepers or third party administrators may need to facilitate the process as they generally prepare Forms 5500 in the small to medium-size plan market.

Similarly, broker-dealers will need to establish systems to provide information to fiduciaries to assist them in the prudent selection and monitoring of the accounts.

Projection of Lifetime Income. The DOL targeted July of 2015 as the date for the issuance of a proposed regulation for the projection of lifetime income on participant benefit statements. Given this timing, we would not expect to see a final regulation until 2016, but we anticipate that it will mandate providing two types of income projections to participants. One would project the monthly income a participant could expect to have based on his current account balance. The other would project the monthly income based on a projected account balance at retirement using various assumptions as to future savings rates, investment returns, pay increases, and life expectancy.

This may be one of the most important items on the DOL agenda from a long-term policy perspective. By providing these projections, it could change participant perspectives -- from viewing their account balance as wealth to viewing it as monthly income. And this could have a positive impact on participant savings rates.

Anticipated Impact on Plan Sponsors

We anticipate that the regulation will mandate projections . . . and that it will provide a safe harbor for assumptions that are to be used in projecting the future account balance and monthly income.

While plan sponsors (as fiduciaries) will be required to provide the projections, recordkeepers will most likely actually provide them to participants. The projections will likely lead to a greater need for education of participants about retirement income. As a result, plan sponsors will need to consider providing this education and in-plan retirement income solutions.

Larger plans may allow retired participants to leave their money in the plans and take retirement income distributions from their plans.


Anticipated Impact on Service Providers

The impact of this change will probably fall most heavily on recordkeepers. Although many already provide some form of retirement income projection on participant statements, they may need to change their systems to accommodate the new rules, especially to use “safe harbor” assumptions for the projection of future account balances. (Note that many comments were filed with the DOL opposing mandated or safe harbor assumptions. Those comments favored a less certain, but more flexible requirement that the assumptions be reasonable. It is not known at this time if the DOL will accept that approach.) In addition, plan sponsors and/or providers may want to add a website calculator (if they do not already offer one) to permit participants to do their own projections based on different assumptions. They may also want to add a “gap analysis” feature to benefit statements, comparing the current projected retirement income at current savings rates to projected income needs at retirement, and suggesting changes in savings rates to target a benchmark goal of retirement savings.

The impact on advisors and consultants will most likely be to provide more education on retirement income needs and how to achieve a desired outcome.

408(b)(2) Guide.  With regard to the proposal for a guide for 408(b)(2) disclosures, the DOL listed September of 2015 as the date for issuance of the final regulation.  The DOL appears to have concluded that the disclosed 408(b)(2) information has been difficult for plan fiduciaries (and particularly fiduciaries of small plans) to locate in multiple or lengthy documents.  The guide would be designed to facilitate the identification of required information, somewhat like a table of contents or index.  However, we believe there may be more to come from the DOL on this regulation . . . focus groups of small plan sponsors are providing information to the DOL that could, along with the comments received on the proposal earlier this year, result in changes to the proposed regulation.

Anticipated Impact on Plan Sponsors

The regulation will likely have the largest impact on smaller and mid-sized plans that may not have the internal resources to easily find the relevant information in complex or lengthy documents. However, it is not clear whether a guide would improve the understanding and evaluation of disclosures by plan fiduciaries.


Anticipated Impact on Service Providers

We anticipate that the guide requirement will have little to no impact on third party administrators and RIAs, because they already use simple, relatively short documents to provide their disclosures in most cases.

For recordkeepers and broker-dealers, however, the impact could be significant since they tend to use multiple documents to make their disclosures. Based on our discussions with representatives of these entities, they will find it expensive and administratively challenging to comply with a requirement of a guide.


If the DOL implements its 2014 agenda, 2015 will be an eventful year.  As these developments occur, we will be sending you bulletins that describe the developments and provide our analysis.

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