The Regulators Are Coming

The Department of Labor (DOL) Employee Benefit Security Administration’s (EBSA) budget has decreased for 2014, but this will not affect enforcement.

Bradford P. Campbell, of counsel at Drinker Biddle & Reath in Washington, D.C., during an audiocast sponsored by the firm, noted that one project of particular interest to retirement plan fiduciaries is the Fiduciary Service Provider Compensation project.  

Fred Reish, a partner in Drinker Biddle’s Los Angeles office, said, in his experience, once the investigations are underway, the DOL has looked most closely at prohibited transaction issues by acknowledge fiduciaries. He pointed out this is not a DOL policy, just something he has seen.  

“The investigations are to make sure that everyone is declaring themselves as a fiduciary that should be,” Campbell stated.   

“Another element of these regulations could be that stock options and stock bonuses could be looked at more closely,” added Reish. “And things like money, computers or software that are received could be considered compensation.”

IRS Enforcement of IRAs  

Reish believes the IRS (Internal Revenue Service) will be looking more closely at IRAs (individual retirement accounts).  

Campbell agreed, adding, “A month ago, the IRS told Congress that it will be more closely investigating IRA distributions in particular. In the past, enforcement in this area has not been as strong as it could and the IRS has let a lot of violations slip by. But once they start cross-referencing their data, it should make enforcement a lot easier.”  

“The problem has been that the IRS has failed to properly audit IRAs over the years and some bad practices have built up as a result,” said Reish.  

Reish added that one interesting thing to come out of this discussion was that many people were surprised to find that the DOL has the authority to write rules about IRAs, even though “It’s always been that way.”  

“The DOL definitely has authority to declare what is and is not a prohibited transaction,” said Campbell. “One possibility that may come about from their proposed fiduciary definition regulations is that IRA providers may be more closely scrutinized.” 

Reish agreed that the industry can expect to see more enforcement when it comes to IRAs, but added, “We may also see more about prohibited transaction exemptions like in 86-128. (Editor’s note: See DOL regulation “Prohibited Transaction Exemption 86-128: Class Exemption for Securities Transactions Involving Employee Benefit Plans and Broker-Dealers.”) People will definitely need to be a bit more careful with IRAs.”  

Retirement Savings Cap  

Speaking about the Obama budget proposal provision to cap retirement savings at $3 million, Campbell said: “There is not a lot of support for this on either side of the aisle. I don’t know if Congress is ready to carry out the tax reform that would be involved here.”  

Reish agreed, adding, “This type of thing would be complex and difficult to administer. Hopefully it will be dead on arrival.” (See “Budget Proposal Could Create Administrative Headache”) 

Campbell believes that instead there may be greater use of Roth accounts, where taxes paid now would generate revenue. “I think that Congress will look to tweaking Roth for further income, since tax reform like the proposed cap could be potentially harmful, especially to small businesses.”  

Reish believes changes, such as those proposed in the budget, could adversely affect highly compensated employees. “If their contribution limits are reduced, we may be seeing more people taking advantage of NQDCs [nonqualified deferred compensation plans] and bonuses to bolster their retirement savings,” he said. “Also, some of these proposed changes would limit savings through defined contribution plans, so we could also see more of a shift over to defined benefit or cash balance plans. One thing that Washington should bear in mind is that the industry has the ability to adjust to change and that once they do, the revenues that Congress was expecting won’t be as much as anticipated.”

Lifetime Income Pre-Proposal  

Reish mentioned that the DOL is looking to issue guidance that would give retirement income projections, or illustrations, on participants’ quarterly statements (see “DOL Seeks Comments About Lifetime Income Data”).  

Campbell elaborated, “This ANPRM (Advance Notice of Proposed Rulemaking) is the DOL asking us to give our thoughts on this pre-proposal. Particularly, the DOL is looking to get input from the public on items such as how the projections are calculated. How the stream of payments is calculated is also important because it can affect how people value their retirement plan.”  

He believes it will be at least a year and a half before we see a final set of rules.   

Reish pointed out that, “There are studies out there that show that when people have data like these projections, they do tend to save more. Also, the projections will show what participants what they will be getting in the future, but participants will also ask how much they really need for retirement. For example, if benchmarking shows that participants will need 80% of their pre-retirement income to make it through retirement, but their plan will only provide them with 60%, then participants will want to know what they have to do to fill that savings gap.”

GAO Report on IRA Rollovers  

Reish talked about a report released by the Government Accountability Office (GAO), which was critical of the rollover process for exiting participants (see “Solutions Exist for Easier Plan-to-Plan Rollovers”). 

“What the GAO did was to contact call centers about IRA distributions and then posted recordings of those calls on their website. The GAO found that these calls were providing participants with partial, inaccurate or misleading information. One issue was with call centers recommending IRA rollovers into proprietary funds,” he said.  

He said that the DOL agreed that, “There is indeed a problem in this area, and that IRA distributions and rollovers need to be further regulated. There is a possibility that the DOL’s fiduciary rule may tie into such regulations. And while some contend that the GAO report is biased, the content of the calls is out there now.”  

Campbell agreed and added, “The DOL is going to do something to regulate IRA rollovers. And regulations may decide that any advice given about this topic is fiduciary in nature.”  

Reish concluded by saying that plan sponsors need to understand what’s being said to participants by these call centers.  

A full recording of the audiocast will be posted online at