Compliance September 10, 2012

PANC 2012: What's Happening at the DOL?

Brokerage windows should not be used to sidestep fee disclosure, a source from the Department of Labor (DOL) stressed. 
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“We don’t like the idea that people might be using brokerage windows as a way to evade the rule,” Michael Davis, deputy assistant secretary for the DOL, told attendees at the 2012 PLANADVISER National Conference. Davis cautioned those who may be advising clients to add brokerage windows to retirement plans in order to avoid having designated investment alternatives (DIAs) and thus avoid fee disclosure.

The DOL’s guidance about brokerage windows appears to be a warning shot for plans trying to do just that. In July, the DOL’s Employee Benefits Security Administration (EBSA) issued Field Assistance Bulletin (FAB) No. 2012-02R, which superseded Field Assistance Bulletin No. 2012-02. The DOL issued its original FAB to provide guidance to its field enforcement personnel in question-and-answer format about the obligations of plan administrators under a final regulation to improve transparency of fees and expenses to workers with 401(k)-type retirement plans (see “DOL Issues Additional Guidance for Participant Fee Disclosures”).

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While the revised FAB does not prohibit brokerage-window only plans, Davis stressed that not having any DIAs raises concerns. “We think that it is better to have designated a suite of options,” he added.

Those who want to continue using only brokerage windows should give it serious thought, Davis said, adding that plan sponsors should determine the reason they have only a self-directed brokerage window option. If the reason is to evade disclosure rules, the DOL “certainly has issues with that,” Davis said.   

Davis also addressed fee disclosure regulations in a general sense. “The fee disclosure rules are a centerpiece on what this administration has been working on, and the administration prior to us,” he said.

Davis emphasized the “good faith” compliance, saying that although both the 404(a)(5) and 408(b)(2) disclosure deadlines have passed, the DOL understands that new rules take some adjusting. “If people are trying to comply, we certainly take that into consideration,” he added.

Regarding 404(a)(5), Davis said the DOL is open to feedback about whether participants understand the disclosure information on their retirement plan statements. “Policy objective was to help people make better decisions, and if 404(a)(5) isn’t doing that, we will absolutely look at that,” he added.

In addition to fee disclosure, Davis addressed the re-definition of fiduciary. “[We knew] this was going to be a very engaged conversation and a very engaged debate,” he said. The DOL received comments that are helping to shape the redrafting of the fiduciary definition (see “PSNC 2012: The New Fiduciary”). “We think the rule is better as a result of this process, but it’s not quite ready,” he said.

After the revised rule is submitted to the Office of Management and Budget (OMB), the OMB has 90 days to review it. Once the rule is submitted to the OMB, it is a “public event” and can be viewed online, Davis added.  

Compliance September 10, 2012

PANC 2012: The Politics of Retirement

The government tries to lend its hand to the retirement readiness goal, but other agendas may get in the way.
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The middle class has taken a hit from the recession, and the least-understood repercussion of this has been the hit to retirement savings, according to Marcia S. Wagner, principal at The Wagner Law Group. “Each leg of the three-legged stool is wobbly,” she told attendees of the 2012 PLANADVISER National Conference, referring to the three sources of retirement income for Americans – Social Security, employer-sponsored retirement plans and personal savings.  

While lawmakers have gotten involved in efforts to solve the retirement crisis, with legislation and proposals to increase savings, promote better returns in retirement plans and facilitate decumulation planning, their efforts on tax reform to solve the nation’s budget crisis threatens to undo it all, Wagner contended.  

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She noted that the Pension Protection Act of 2006 helped to increase savings by giving statutory cover to plan sponsors that adopt automatic enrollment and automatic escalation. This led to plan sponsor and plan adviser initiatives to re-enroll and/or re-allocate all employees, which Wagner said do not have statutory cover, but sponsors and advisers should nevertheless move forward – because she thinks these initiatives will soon. Automatic IRAs have also gained bi-partisan support from lawmakers, which would increase savings for employees of the smallest employers.

Regulations concerning fee disclosure and participant advice, as well as the impending re-definition of fiduciary coming from the Department of Labor, are designed to put downward pressure on fees and to create an interest in more levelized fee arrangements, which will help retirement plan participants receive better returns on their investments, Wagner said.  

The recent Internal Revenue Service exemption for longevity annuities in defined contribution plans from onerous death benefit rules, as well as efforts to relax required minimum distribution (RMD) rules are government efforts that would facilitate decumulation planning, she said.  

However, when Congress considers tax reform to help lower the nation’s debt, retirement plans also enter the discussion, and not in a good way. According to Wagner, in the government’s view, favorable tax treatment for retirement plans will result in $361 billion in foregone revenue from 2011 to 2015. “Plan limitations can, have and will change, depending on what society needs,” Wagner warned. “And they can be lowered to reduce the national debt.” Not only are lawmakers talking about lowering amounts that receive favorable tax treatment, but they have also considered making contributions to retirement plans immediately taxable.   

These discussions have sparked lobbying from industry groups that represent plan service providers, plan sponsors and investment providers, who all say reducing tax incentives to save for retirement will reduce plan offerings and contributions by employees at all wage levels, Wagner said. “It will reduce the role of employers in the retirement industry,” she concluded.

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