Compliance May 23, 2012

DOL’s Answer in Fee Disclosure Guidance ‘Surprising’

When reading Field Assistance Bulletin 2012-02, relating to participant fee disclosures, some industry experts are particularly surprised by the Department of Labor’s (DOL) response to Question 30.
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The DOL’s Employee Benefits Security Administration (EBSA) recently issued frequently asked questions about the requirements of new participant fee disclosure rules. The bulletin answers questions about what types of plans are covered under the regulation and addresses methods of disclosing plan-related information and how to deal with revenue sharing.

Question 30 asks whether an investment platform offered by a retirement plan is considered a designated investment alternative when the platform includes many registered mutual funds of multiple fund families to which participants and beneficiaries may direct the investment of assets held in or contributed to their individual accounts. It adds that although the plan fiduciary selected the platform provider, the fiduciary did not designate any of the funds on the platform as “designated investment alternatives” under the plan.

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The DOL responded by saying that although the regulation does not specifically require a plan to have a particular number of designated investment alternatives, the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of the Employee Retirement Income Security Act (ERISA).

“So the DOL is throwing down the gauntlet here,” Fred Reish, chairman of the financial services ERISA team at Drinker Biddle & Reath LLP, told PLANADVISER.

The DOL goes on to say that unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives. Designating specific investment alternatives also enables participants and beneficiaries, who often lack sufficient resources to screen investment alternatives, to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives for their accounts.

Reish interprets the DOL as saying plan sponsors now must look at how their participants are investing inside of brokerage accounts.  “All of a sudden, you have to look at investment patterns of participants,” he said. “You have to see if something is so commonly used that it needs to be labeled a designated investment alternative.”

Roberta Ufford, principal at Groom Law Group, said she is also surprised by the DOL’s answer to question 30. “Some plan sponsors have thought, ‘If I have a totally open brokerage window, I don’t have any designated investment alternatives,'” she said. The DOL, however, seems to be saying that the failure to designate a manageable number of investment alternatives can raise fiduciary questions.

“The typical 401(k) plan [that has a core lineup] will not be affected, but if you don’t offer a core lineup, I think the DOL just threw you under the bus,” Reish said. “That’s the most shocking thing I found in here.”

Field Assistance Bulletin No. 2012-02 is available here.

Data & Research May 23, 2012

Small Businesses Concerned About Possible Retirement Savings Legislation

Small businesses are increasingly concerned about the inadequacy of retirement savings for many Americans and possible government responses, according to a provider of payroll services.
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Small firms represent 99.7% of all employer firms and employ half of all private-sector employees in the U.S., according to the Small Business Administration, making the concerns of small-business owners especially significant for the election.

The regulatory team at Paychex Inc. found that among election-year issues that concern small-business owners and entrepreneurs, the possibility that employers may have to deal with a mandated solution, such as an auto-enrollment IRA, looms large.

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Because of the amount of talk about getting people to save, the possible shortfalls in Social Security payments, some people think some kind of payroll deduction might be needed, said Mike Trabold, senior manager of compliance risk at Paychex.

“Everyone we talk to is very sensitive to the fact that Americans aren’t saving enough,” Trabold told PLANADVISER.

Auto-enrollment is certainly gaining increased awareness, he said, and asked, “How would a mandated payroll deduction affect a small business? What would be the responsibility for a small-business owner?”

According to Trabold, small businesses are also interested in making it easier to form and maintain multiemployer plans; making electronic disclosure easier; and sensitive to possible burdens from auto-IRA.

Another likely election subject will be the degree of existing and proposed regulations facing small businesses and striking the right balance between business and consumer priorities. The existence of a business-friendly environment, also referred to as freedom from undue regulatory burden, is usually seen as a primary factor in a small-business owner’s appetite for expanding or investing in his or her business.

The election-year list was compiled by the regulatory team at Paychex, which works closely with the IRS and other government agencies to monitor legislative and regulatory issues that have an impact on the company’s 564,000 clients across the country.

More about these and other regulatory issues Paychex follows is available here.  

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