Inside View of DOL Fiduciary Rule Arguments Before 5th Circuit

Oral arguments in the consolidated case against the DOL and its fiduciary rule reforms were heard Monday morning by the 5th Circuit Court of Appeals; ERISA attorney Erin Sweeney offers her take.

Lawyers for the Department of Labor (DOL) faced tough questions from one judge on the 5th U.S. Circuit Court of Appeals, which on Monday heard oral arguments in the consolidated lawsuit filed to block the DOL’s fiduciary rule expansion by investment and insurance trade groups, among others, including the U.S. Chamber of Commerce.

According to Erin Sweeney, previously a senior benefit law specialist at the DOL and currently a member in the Employee Benefits Policy practice of Miller & Chevalier, who attended the arguments and afterwards shared her analysis with PLANADVISER, the DOL had a tough day in court. In particular, one judge on the three-judge panel that has been assigned to the case seemed to have little sympathy for the basic strokes of the DOL’s arguments.

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“Judge [Edith] Jones spent a very significant portion of the time of the hearing asking for more or less basic information about whether a sale of a product taken in itself could ever constitute investment advice,” Sweeney explained. Judge Jones did probably 95% of the questioning of the DOL attorneys, and she really took them to task. “It left those of us in the room wondering what the opinions of the other two judges might be. The other two judges were more or less silent.”

Sweeney noted that Judge Jones asked a number of questions about prohibited transaction exemptions that already existed prior to the ongoing fiduciary standard expansion—about how these exemptions speak of the difference between sales interactions and investment advice.

“DOL frankly was caught flat-footed on many of her questions,” she added. “The judge kept going to sections in the Internal Revenue Code and kept pounding on idea that the department has not addressed this overlap in how some of its previous exemptions may impact advice under the new fiduciary rule. I view this as a red herring to some extent but, clearly, the judge is thinking about it … The end result is that the DOL did not get to talk about its broad authority granted by Congress because it was instead forced to address this very specific matter. It was almost off-topic questioning, from the DOL’s perspective.”

Sweeney said the Chamber of Commerce and other appellants had an easier time staying on message, successfully making their arguments that DOL should not have authority over individual retirement accounts, that a sale of a product cannot constitute fiduciary advice, that DOL is limiting their 1st Amendment rights, etc.  

“My take is that, by and large the Chamber and other appellants got to make their arguments, while the DOL was bogged down by the somewhat off-topic questioning from Judge Jones,” Sweeney said. “The DOL attempted to answer her question by pointing to Chevron deference, but the judge did not seem to see that connection.”

In the end, Sweeney said the hearing today does not give much indication about which way the 5th Circuit could come down. However she said she expects the decision to come down sooner rather than later, given that the court understands there are pressing deadlines coming in 2018 for providers to comply with the expanded fiduciary rule. 

Closed and Frozen DB Plans Still Require Advisers

While most employers outsource administration of frozen and closed DB plans, others team with consultants to set goals, tame plan data and answer questions concerning benefit accruals.

If you purchased a large home when raising a family, would you continue to pay for it once the kids have grown and moved away? For many, it may be worth downsizing to fit a new set of needs and goals. 

That’s the analogy Monica Gallagher, a partner at October Three Consulting, utilizes to describe the work of administering a frozen defined benefit (DB) plan. Just because a plan is frozen doesn’t mean the job of managing it will go away altogether, so a reassessment of needs and services is always in order once a DB plan is frozen. 

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According to Gallagher, along with Stu Lawrence, national retirement practice leader from Segal, expenses concerning administration of the plan; actuary and accountant tasks; and Pension Benefit Guaranty Corporation (PBGC) premiums are all still responsibilities sponsors must face when freezing their plans. Additional services involve supervising the actuaries and accountants who evaluate liabilities, calculate contributions and otherwise oversee the plan.

Lawrence notes that while the audit process may grow slightly easier as a frozen plan decreases in the number of participants, costs—for the most part—will remain the same. “The costs haven’t changed. It might be easier to do an audit of those plans, and the fees from the actuarial calculation might go down, but the accountant and actuary will still charge their basic fee,” he says. Plan sponsors can use a lot of help in maximizing cost efficiency in this environment.

According to Lawrence, DB plans can be in one of four stages—ongoing, closed, frozen and terminated. Advisers can have a role to play at each stage. A terminated plan requires that an employer build a process for settling the plan obligations; ongoing plans have participants who are still accumulating benefits as service continues; closed plans, also known as soft-frozen plans, block new participants from entering, yet allow existing employees to resume benefit accrual; and frozen plans strictly disallow all participants from accruing benefits.

“For most, you start with an ongoing plan, then the client may become a closed plan, a frozen plan, and at some point, you’re going to be a terminated plan,” Lawrence explains.

The experts warn that it is generally not suitable for a closed plan to remain in that state indefinitely. As Lawrence describes, when existing plan participants age in a closed plan, pay raises and higher salaries are given; therefore in ten years’ time, when the only workers in the plan are those with a decade of service or more, the plan “transitions from a closed one to a discriminatory one,” because it only favors the higher paid. This, in turn, forces the plan to freeze, unless the plan sponsor finds another way to address discrimination testing challenges. 

“Closed plans can be a temporary state, but at some point, just by the passage of time, it’ll become a discriminatory plan, and then it has to become a frozen plan,” Lawrence explains. Relevant to this conversation, lawmakers are right now working to amend nondiscrimination rules for closed or frozen plans.

Rather than allow a closed plan to eventually shift to frozen, Lawrence advises employers to lay out a journey for the plan, and then stick to following it. “A lot of employers overlook the journey to get to the destination,” he says.

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