Borzi Provides an Update of Proposed Regulations

There are still changes to be made to 408(b)(2), said Assistant Secretary of Labor Phyllis Borzi, speaking last week.

Secretary Borzi of the Employee Benefits Security Administration (EBSA) addressed the Departments’s work with fee disclosures, lifetime income, electronic disclosure, and the definition of fiduciary at a meeting of the International Foundation.

The regulation concerning investment advice is under examination at the Office of Management and Budget (OMB) and is expected to be released in the next few months, Borzi said (see “DoL Proposes Revamped Investment Advice Rule”).  

Fee Disclosure 

Borzi then addressed the proposed fee disclosure regulations, both for vendors and advisers to provide to plan sponsors, and for plan sponsors to provide to participants (see “DoL Issues New Fee Disclosure Rules” and “EBSA Releases Final 401(k) Fee Disclosure Rule,” respectively).

“The employer has a very, very strong interest in making sure the fees it pays are as low as possible, because they have to make up the difference [in a defined benefit plan]. In a 401(k), it’s the participants that would have to make up the difference–the fees are almost always passed through,” Borzi said.

The participant disclosure regulation has been finalized and is set to become effective January 1, 2012. The fee disclosure regulation for vendors to provide to plan sponsors has been a slower process, she said. It has not yet gotten to the OMB, but it will in the next few weeks.Once it’s at the OMB, it will take at least 90 days for it to be released.

“One reason we were slow in finalizing this reg was when it was put out in proposed form, we had a lot of comments from consumer organizations…who were concerned that the plan sponsor would get boxes and boxes of information from the vendor–an information dump. And particularly small-plan sponsors would be befuddled. So proposals were made to make a summary disclosure…It’s taken us a while to work through those comments. Some suggested a single sheet, others said no, it should be more of an index or roadmap. We’ve made some decisions and that regulation will be going forward to OMB within the next week or two,” she concluded.

Definition of Fiduciary  

Borzi said, of the regulations the Deparment of Labor is currently involved with, the proposed regulation that “would make the definition of fiduciary more consistent with the statute” has stirred the most controversy.

The “artificial” five-part test introduced in 1975 have left plan sponsors and participants exposed, she said. “What we’ve discovered is that in private practice, people who assumed in writing fiduciary liability, when things went south, the trustees were left alone. So the DoL ends up going after the small-plan sponsors–and they’re the victims,” she said. “They thought they were getting sound advice. So this proposal is about accountability, transparency, and reducing conflicts of interest.”

She said the proposal has been very controversial, but EBSA is moving forward on it. “We’re not folding up our tents and going home because we think this is really, really important to employers and participants in the IRA marketplace,” she concluded. The comment period closed on April 12 (see “Fiduciary Proposal Shows EBSA Getting with the Times” and “DoL Broadens Fiduciary Net”).  

Lifetime Income 

Borzi also addressed the growing issue of lifetime income needs for plan participants. “One of the virtues of DB plans is that the benefits are distributed in a lifetime income stream. In the 401(k) world that’s not the case; people get lump sums. And if you think about it, that’s probably the biggest sum of money this person has ever gotten in their whole life,” she said. How an individual will manage that money to last through retirement is a relatively new conundrum in the history of retirement planning.

“We’ve been looking at this issue along with Treasury Department to see what we could do to educate the public about the importance of a lifetime income stream without requiring it,” she said. “The first 300 or so comments we received to our joint request for information were from people accusing us of trying to steal their 401(k) plans. ‘Another government takeover,’ when all we were trying to do was see if there’s something the government can do to help people learn about their choices to ensure security.” She said they have some proposals they are working on, but nothing has been made public yet.

Electronic Communication  

Addressing the growing call to allow participant communication to be done electronically, Borzi said she and her boss, Department of Labor Secretary Hilda Solis, have some concerns about this request. The argument people are using is that access to the internet is more available than ever before, Borzi said. However, she and Solis “don’t necessarily see a connection between access to the internet and people wanting to get all of their financial info electronically.” The Secretaries are particularly concerned about low income people or people with disabilities who may not have complete access.

A request for information is out, and the comment period ends June 6 (see “DoL Seeks Comments on Electronic Disclosure”).