Legislative and Judicial Actions

Art by Eron Hare

DOL Approves Fiduciary Rule Delay

The Department of Labor (DOL) has decided to delay implementation of the special transition period for the fiduciary rule’s best interest contract exemption (BICE) and the principal transactions exemption, as well as of the applicability of certain amendments to prohibited transaction exemption (PTE) 84-24 for 18 months, from January 1, 2018, until July 1, 2019.

The decision follows the review of the delay by the Office of Management and Budget (OMB), at the DOL’s request in early November.

The DOL plans to use the 18 months to review the numerous public comments it has received and to determine whether the exemptions are appropriate in light of action by the Securities and Exchange Commission (SEC), state insurance regulators and other regulators. The president has also asked the department to review whether the fiduciary rule would limit Americans’ access to retirement information and financial advice.

Throughout the transition period, fiduciary advisers will need to keep their clients’ best interests at heart when making investment recommendations.

The Financial Services Institute (FSI) and American Council of Life Insurers both issued statements applauding the delay, while the Financial Planning Coalition said it is strongly against it.

401(k) Contributions Safe—For Now

The text of the House of Representatives’ sweeping tax reform legislation leaves 401(k) account tax-deferral limits alone. The nearly 500-page bill builds on a nine-page framework previously released by the Republican Party, with a number of important changes. For example, the legislation calls for four main tax brackets, rather than the three outlined in the framework. It will take time to absorb more subtle details in the technical legislation, but so far the retirement industry reaction has been cautiously positive.

On reviewing the draft of the legislation, now approved, Dale Brown, Financial Services Institute (FSI) president and CEO, expressed confidence that tax incentives for retirement accounts would be protected.. “In addition to retirement savings incentives, FSI has long supported tax reform that safeguards the important role of independent contractors in our economy, and provides equitable treatment of pass-through entities operated by financial advisers. We look forward to working with members of Congress and the administration throughout this process to ensure the final tax reform bill achieves these purposes.”

Bill to Strike Fiduciary Rule Passes

The Protecting Advice for Small Savers (PASS) Act of 2017, which aims to repeal the Department of Labor (DOL) conflict of interest, or fiduciary, rule, has passed the House Financial Services Commission.

The bill seeks to establish its own best interest standard for broker/dealers (B/Ds), while moving all fiduciary rulemaking powers to the Securities and Exchange Commission (SEC) and away from the Department of Labor (DOL). It also means to erase “related prohibited transaction exemptions [PTEs] published April 8, 2016.”

Senate Tax Proposal Hits Deferred Compensation

Senate Finance Committee Chairman Orrin Hatch, R-Utah, makes what is a very important procedural point about the tax reform overhaul proposal released by Senate Republican Party leadership: “This is just the start of the legislative process in the Senate.” There will be, Hatch pledges, a robust committee debate on all the policies in the bill. And, unlike with the failed health care reform effort, there will be an open amendment process, he claims.

Among highlights from the draft of the Senate proposal, a sister version of a House proposal that passed on November 16, it maintains “conformity of contribution limits.” Yet, it also applies a 10% early withdrawal tax to Section 457(b) plans and proposes elimination of catch-up contributions for “high-wage employees,” those making over $500,000 a year.

The proposal applies a single aggregate limit to contributions for an employee in a 457(b) plan and elective deferrals for the same employee under a Section 401(k) plan or a 403(b) plan of the same employer. Thus, the limit for 457(b) plans is coordinated with the limit for 401(k) and 403(b) plans in the same manner as limits are coordinated under present law for elective deferrals to 401(k) and 403(b) plans.

Related to this, the proposal repeals the special rules allowing additional elective deferrals and catch-up contributions under 403(b) and 457(b) plans. So the same limits apply to elective deferrals and catch-up contributions under 401(k), 403(b) and 457(b) plans. The proposal repeals the special rule allowing employer contributions to 403(b) plans for up to five years after termination of employment.

IRS, Treasury Present Priority Guidance Plan

The Treasury Department and the Internal Revenue Service (IRS) released the 2017–2018 Priority Guidance Plan, listing projects the two agencies hope to complete during the 12-month period that started this past July 1 and ends June 30, 2018.

Among the retirement-plan-related projects on the agencies’ list is completion of some long-awaited guidance—for example, the final regulations concerning application of the normal retirement age regulations stated in Section 401(a) to governmental plans. Proposed regulations were published on January 27, 2016. In addition, the agencies hope to issue regulations on the definition of governmental plans under Internal Revenue Code (IRC) Section 414(d). An advanced notice of proposed rulemaking (ANPRM) was published on November 8, 2011.

The guidance plan also includes final regulations regarding qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs).

GE Faces Second Self-Dealing Suit

Another participant in the GE (General Electric Co.) Retirement Savings 401(k) Savings Plan has filed a lawsuit alleging self-dealing by the company in offering investments managed by GE’s investment management arm, General Electric Asset Management (GEAM).

The complaint says 401(k) plan fiduciaries violated the Employee Retirement Income Security Act (ERISA) fiduciary and prohibited transaction regulations by offering and failing to follow five investment fund options offered by the plan: GE Institutional International Equity Fund, GE Institutional Strategic Investment Fund, GE RSP US Equity Fund, GE RSP US Income Fund and GE Institutional Small Cap Equity Fund.

The plaintiff says these funds were among the 15 investment options, other than target-date funds (TDFs), offered in the plan during the class period, and all were managed by GEAM. The complaint further states the GEAM funds are the only non-index funds offered to plan participants, so if someone wants to invest in actively managed funds, he is forced by GE and the plan trustees to invest in GEAM funds.

Treasury Calls for More In-Plan Lifetime Income Products

In a new report, “A Financial System That Creates Economic Opportunities,” the U.S. Treasury Department discusses the advantages of lifetime income products—i.e., annuities.

The department says that research from the Center for Retirement Research at Boston College has shown that half of working-age households may be unable to maintain their standard of living in retirement, primarily due to longevity risk.

“Although 401(k) plans and other defined contribution [DC] plans are important retirement savings vehicles, they differ from traditional pension plans in that 401(k) plans are designed and used primarily for asset accumulation rather than as a source of guaranteed income,” the Treasury Department says in its report. “In addition, only about two-thirds of private-sector workers have access to any type of employer-sponsored retirement plan, and even workers enrolled in a 401(k) have limited access to guaranteed lifetime income under the plan.”

The department notes that annuities are the only products on the market that offer guaranteed income, but employers “cite concerns over legal liability under the Employee Retirement Income Security Act [ERISA] as the principal deterrent to offering an in-plan annuity option.”

IRS Guidance on Loan Repayments

The Internal Revenue Service (IRS) issued a memorandum on defined contribution (DC) plan loan cure periods for participants who have failed to make installment payments.

On a regular basis the IRS notes that loans, as long as not for the purchase of a primary home, must be repaid in five years and that payments are due at the end of each month for the term of the loan.

But if a participant misses a payment, according to the memorandum, he can make it up by the last day of the calendar quarter following the quarter in which the payment was due, the IRS says. He may also refinance the loan—but the original loan’s due date stands.

U.S. Bank Wins Appellate Confirmation

The latest decision in a complicated example of Employee Retirement Income Security Act (ERISA) litigation involving the pension plan of U.S. Bank comes out of the U.S. 8th Circuit Court of Appeals.

Plaintiffs originally challenged the bank’s “adoption of a risky strategy of investing plan assets exclusively in equities and its continued pursuit of that strategy in the face of a deteriorating stock market; the bank’s investment of plan assets in its subsidiary FAF Advisors; and FAF Advisors’ actions with regard to a securities lending portfolio.” The plaintiffs sought to recover plan losses, disgorgement of profits, injunctive relief and/or other relief under ERISA.