In the article “DOL to Act on Credit Rating Use in 401k Fiduciary Decisions,” benefits and executive compensation partner Fred Reish spoke to 401(k) Specialist about the use of credit ratings by fiduciaries when making decisions for retirement plans.
According to the publication, after the financial crisis of 2008, the Dodd-Frank Wall Street Reform Act blocked the use of credit ratings for exemptions from prohibited transactions. Recently, the Department of Labor (DOL) announced it would reopen the comment period on proposed amendments to six class exemptions from prohibited transaction rules related to Dodd-Frank’s credit rating prohibition.
Reish noted that one of the root causes of the Great Recession was the credit ratings of tranches of securitized mortgages on residential property and other indebtedness. Some of the risky tranches were rated as if they were relatively safe investments.
“Once the market imploded, much of the security for those tranches became worthless,” Reish explained. “As a result, the Dodd-Frank Act forbade the use of credit ratings for exemptions from the prohibited transaction.”
Calling the Dodd-Frank legislation “overreaching,” Reish added that the DOL must now implement the restrictions on credit ratings, regardless of the type.
“That is unfortunate,” Reish concluded. “In some areas, I believe that credit ratings should be at least a part of the process used by plan fiduciaries in making decisions.”