Capitol News

Implications of Fiduciary Proposal Remain Opaque

The Department of Labor (DOL) still says its pending fiduciary rule proposal, though subject to change, will not prohibit common advisory compensation practices, such as commissions and revenue sharing. DOL sent its new fiduciary rule proposal to the Office of Management and Budget on February 23.

As noted in a recently published FAQ section on the Department of Labor (DOL) website, the new fiduciary rule will include proposed exemptions from the Employee Retirement Income Security Act’s (ERISA) and the Internal Revenue Code’s restrictions on financial fiduciaries receiving conflicted compensation, and the agency will request public input on the final design of the exemptions.

The exact shape of the new fiduciary rule and any accompanying exemptions remains unknown, with the proposed rule language reportedly under preliminary review by the Office of Management and Budget. However, a speech by President Obama to AARP suggested a crackdown on abuse in the financial advisory industry is imminent, setting off a major adviser and broker response calling the administration out of touch.

In a replay of the derailed 2010 effort to adopt a strict new fiduciary standard applying broadly to brokers and advisers, there was both pushback and applause from different industry practitioners. Some took clear offense from the president’s suggestion that widespread abuse by financial advisers is robbing millions of Americans of billions of dollars annually. Others, like AARP and fellow sponsors of www.saveourretirement.com, repeated the president’s call for overdue reform.

U.S. Supreme Court Hears Tibble v. Edison Fee Case

The U.S. Supreme Court heard oral arguments on February 24 in a case considered by many to be the first example of excessive 401(k) fee litigation to reach the nation’s highest court.

A review of argument transcripts in Tibble v. Edison shows U.S. Supreme Court justices had an extensive amount of questions for both the appellants and appellees—many of which strayed far beyond the narrow review the Supreme Court initially said it would limit itself to. It is an excessive fee litigation case levied by employees of utility company Edison International, alleging the company breached its fiduciary duty by offering retail-class mutual funds as retirement plan investments when lower-cost institutional funds were available.

Justices probed attorneys for both sides with a wide variety of questions about their views of the Employee Retirement Income Security Act (ERISA) and how its requirements and relevant case law should be interpreted.

Earlier case filings show the Supreme Court justices planned to limit their review of Tibble to the following question: “Whether a claim that ERISA [Employee Retirement Income Security Act] plan fiduciaries breached their duty of prudence by offering higher-cost retail-class mutual funds to plan participants, even though identical lower-cost institution-class mutual funds were available, is barred by 29 U. S. C. §1113(1) when fiduciaries initially chose the higher-cost mutual funds as plan investments more than six years before the claim was filed.”

“It’s an interesting case because both sides, in their briefs, essentially agree that there is such a duty to monitor,” says Michael Graham, a partner and co-chair of the ERISA Litigation Affinity Group at international law firm McDermott Will & Emery. “The disagreement is when that duty arises.”

Given the varying signals from the Supreme Court, Graham says there is still a multitude of ways the final decision could go; some that would be more overarching on the duty to monitor, and some that would allow the court to avoid the issue and remand the matter to the lower courts to build up more case law.

DOL Collects Nearly $600M in 2014 Enforcement Actions

The Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) recovered nearly $599.7 million in 2014 for direct payment to employee plans, participants and beneficiaries.

Part of the Department of Labor, EBSA’s oversight authority extends to nearly 684,000 retirement plans, approximately 2.4 million health plans, and a similar number of other welfare benefit plans, such as those providing life or disability insurance. These plans cover about 141 million workers and their dependents and include assets of over $7.6 trillion as of October 29, 2014.

EBSA says other civil investigation statistics demonstrate its success in targeting ERISA violators. In fiscal year 2014, EBSA closed 3,928 civil investigations, with 2,541 of those cases (64.7%) resulting in monetary compensation for plans or other corrective action. This represents about a 9% decrease in the rate of infractions found in 2013.