Compliance March 1, 2011

Great-West Fears Industry Setbacks

Federal regulators heard from the president of Great-West Retirement Services who said efforts to rework the definition of a fiduciary could "set the retirement industry back 25 years."
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Great-West president, Charles P. Nelson, warned the Department of Labor’s Employee Benefits Security Administration (EBSA) at today’s hearing that his company is “deeply concerned” that some provisions in the proposed rule will deeply damage the industry. Some of the points he made included: 

  • Dramatically increasing costs to 401(k) participants and plan sponsors by eliminating advancements that provide DC plans with greater efficiencies and cost-savings though open architecture investment platforms, and, 
  • Substantially curtailing plan distribution communication, education and counseling, reducing the availability of information participants need to make informed decisions about their distribution options.

According to Nelson, EBSA’s intended policies with the rule change are not clear from the text of the proposal, preventing thorough public review and comment. Revising the rule for public review and comment will enable the Department to articulate a clear standard. Asserted Nelson: “Rather than speculating on what the rule might mean, commentors will be able to offer more meaningful comments on what the rule would actually do.”

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Nelson testified that Great-West is also concerned that it is unclear what the Department meant by limiting the exception to providing “general financial information” about platform investments. “We believe ‘general financial information’ should include information platform providers provide related to plan mapping and conversions, such as assistance in determining which platform options are similar to the prior plan investments.”

The Great-West executive backed the sales exception in the rule but said “we are concerned that the exception as written would not work in practice.” According to Nelson, the proposal should expressly recognize that the sales exception is not limited to a specific point at the beginning of the relationship. Information related to sales is exchanged on an ongoing basis as plans make changes to fund line ups or implement new design features months or years later.

Finally, Nelson said Great-West is “very concerned” about the future of advice to IRA-holders and distribution counseling for participants. Nelson concluded: “We believe the Department has identified some valid concerns with the existing regulation, but we also believe that the proposal as written does not work. We should not create new problems while trying to solve old ones.”

Compliance March 1, 2011

ABC Warns against Too Broad a Definition of Fiduciary

The American Benefits Council (ABC) spoke at the Department of Labor’s (DoL) hearing today about its proposed redefinition of fiduciary.
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Kent Mason, partner with Davis & Harman, speaking to the Employee Benefits Security Administration (EBSA) on behalf of the ABC, cautioned that “an overly broad definition would actually have a very adverse effect on retirement savings by raising costs and inhibiting investment education and guidance for plan participants.”  

Mason noted that “an ERISA fiduciary relationship is a very serious relationship with the highest fiduciary standard under the law. In that context, fiduciary status should not be triggered by casual discussions but only by serious communications that reflect a mutual understanding that an adviser/advisee relationship exists. In our view, a fiduciary relationship should not be treated as existing in any case unless there is a mutual understanding that the recommendations or advice being provided in connection with a plan will play a significant role in the recipient’s decision-making.”   

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In considering who then should be designated as a plan’s fiduciary, Mason answered, “Common practice is for a plan sponsor to form a committee of senior executives to oversee plan issues, including plan investment issues. It is certainly clear that such committee has fiduciary status. But under the proposed regulations, large numbers of middle-level employees who frame issues and make recommendations for senior employees to consider would also be fiduciaries. The effects of too many fiduciaries with no decision-making ability would be severely negative to the plan and the related administrative costs would skyrocket.”  

Mason also suggested that if a one-time recommendation can give rise to fiduciary status, it is essential to distinguish between fiduciary recommendations and the selling of investment products or services. He said the Council applauds the Department for including an exemption for persons acting as, or on behalf of, purchasers or sellers, however, it is critical that the scope of this exemption be expanded and clarified.   

The Council said it was urging EBSA and the Securities and Exchange Commission to coordinate and articulate a single standard of conduct applicable to brokers and dealers in providing investment advice and for the Commodity Futures Trading Commission to bring its proposed standards for business conduct regarding swaps in alignment with those of the DoL.  

The ABC’s comment letter to the EBSA on the proposed regulations is here.

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