Friday, June 24, 2016

Will Fiduciary Rule Survive Rising Tide of Lawsuits?

The first week of June saw the filing of two lawsuits challenging the Department of Labor’s final fiduciary rule and its accompanying exemptions.  Those in a position to know were confident that it was only a matter of time before additional lawsuits were filed, and they were right.  At the time of drafting this blog, the number of suits had increased to five.  Just how many will ultimately be filed is still an open question.  The common aim of these legal actions is an injunction to prevent the collective guidance from being implemented, despite the official June 7th effective date and start of transition period having already been reached.  It is the hope of some opponents that an injunction could buy time, and that a new administration in the White House might choose to nullify the guidance.

Regardless of the probability of success of these legal challenges, it seems this result was inevitable, if for no other reason than that this guidance has been accompanied by more controversy than the industry has seen in a very long time. 

The plaintiffs in the first lawsuit filed included a group of chambers of commerce and financial services industry groups, filing in a jurisdiction – the U.S. District Court for the Northern District of Texas – that is not particularly cozy with Washington, D.C., interests.  Whether this venue – a venue also chosen for at least one of the subsequent lawsuits – will translate to an injunction remains to be seen.  Even if this happens, it is certain that the DOL would file an appeal in an attempt to vacate the injunction.  Some speculate that the legal process could ultimately lead to the U.S. Supreme Court. 

The plaintiffs’ arguments for an injunction are numerous, and while similar in nature,  are not completely uniform from one lawsuit to another.  Collectively, they include – among other charges – DOL infringing on the authority of other federal and state agencies, doing financial harm to investors, violating the Federal Arbitration Act, violating the First Amendments freedom of speech, exposing financial advisors and their employers to litigation risk, and issuing a final rule with new conditions that allowed no opportunity for public review and comment. 

This last accusation is one that is thought to have a greater chance of swaying a court in favor of the plaintiffs.  There were, in fact, some important new provisions in the final rule that were not open to comment, if for no better reason than that no one knew of them before April’s release.  One of these was a sweeping definition of the “management” of securities.  Another was the loss of the prohibited transaction exemption for Indexed annuities.

 Another charge that might have some possibility of “sticking” is that DOL, despite their claims to the contrary, does not appear to have coordinated in a serious way with the Securities and Exchange Commission (SEC), an agency empowered by the Dodd-Frank Wall Street Reform Act to undertake such a regulations project as this.  DOL has released e-mails as evidence of some communication with SEC, but many feel these do not come close to the level of cooperation or coordination hoped for and expected.

More than one of the lawsuits charged that DOL was “arbitrary and capricious” in formulating its final regulation.  This may have merit from the standpoint that DOL could reject at will any of suggestions in the more than 3,500 comments it received on the regulations.  But the long history of these regulations – dating back to 2010 – and the multiple comment periods and public hearings, suggest a deliberate process rather than caprice.

To obtain an injunction, plaintiffs must generally demonstrate certain things.  For instance, convincing a court that the plaintiff’s case has merit and could potentially be won at trial.  Or, that failure to issue the injunction will result in injury to another party, such as retirement investors.  These may not be so easy to prove to a court’s satisfaction.

There is a history of federal agencies being given the benefit of the doubt in interpreting statutes and issuing regulations.  We have, however, seen cases in which the courts have overruled federal regulatory agencies, such as a U.S. Tax Court ruling that overrode a 30-year IRS interpretation of how many IRA rollovers a taxpayer is entitled to.  But the courts are inclined to defer to the interpretive judgment of federal agencies unless there is a compelling reason to do otherwise. 
Perhaps this is one of those compelling situations.


Legal actions like these motions for injunction end in a formal request for remedies.  Perhaps surprising in our generally secular society, the official name for this request for remedy is called a “prayer for relief.”  Perhaps that’s fitting, since both supporters and opponents are hoping for a little divine intervention for their side.  Whether, or how, that happens will ultimately be up to the courts.

Monday, June 6, 2016

Let’s Hope the Regulation is Worth It

I’m sure that “the regulation” needs little, if any, further definition. Just as “the drive” in Super Bowl annals will always be associated with John Elway and the Denver Broncos, “the regulation” is a good candidate to forever be associated with the Department of Labor and its fiduciary definition package of final regulations and exemptions.  This guidance has been that big.

Big, of course, can mean a couple of things.  In terms of length in its Federal Register-published version – or any version, for that matter – the guidance is certainly big.  It fills more printed pages than any other in my 31 years in the retirement industry.  In terms of its potential impact on the way advisors do business with retirement investors, it is certainly big.  While notably improved over the proposed regulations, the final regulations are likely to be just as demanding in terms of the analysis required to comprehend what it all means, and configure operations and administration in order to comply. 

These DOL regulations contain a Regulatory Impact Analysis that attempts to quantify in dollars-and-cents terms the effort – translated into cost – that will be required to comply.  Notably, the costs being accounted for – whether or not they are reasonably accurate – measure chiefly those costs incurred by individuals and organizations involved in the advising relationship.  The brokerage, the mutual fund company, insurance company, street corner bank or credit union, and their employees or affiliates, are theoretically taken into account in this assessment of effort and cost.

One expense we can find no evidence of being taken into account by DOL is the effort being expended by organizations that consult with, and counsel, financial organizations and advisors who must comply with the new rules.  Benefits consulting firms, including law firms whose practice specializes in retirement benefits, are included in this group. 

DOL might argue that their final regulations and exemptions are a boon to such businesses, and a revenue stream for the analysis and guidance that must be given to their clients.  If only that were true.  Certainly there are firms that work strictly on a billable-hours basis, and for them the changes may trickle down to a better bottom line.  But that is far from universally true.   My firm is a typical for-instance.  We serve qualified retirement plan recordkeeping clients, IRA, HSA and ESA custodians, trustees and issuers, and have many partners and clients that use a wide variety of our services and products that are tied to tax-favored savings.

Almost without exception, our service agreements include interpreting and sharing findings related to our clients’ compliance responsibilities.  Whether we inform them in web site postings, in articles written for industry media, create special webinars, or assist in strategizing changes to product offerings, we are “at their service.”  We don’t shrink from such responsibilities; such relationships are a privilege.  But such relationships do not yield windfalls, as some might believe.


Even a very superficial tallying of the “man hours” that have gone into analyzing this fiduciary guidance reveals that it has been a huge expenditure of time and talent for our staff to understand and share their meaning and impact.  We take pride in our ability to dissect and interpret, and to be an important compliance resource to our clients.  But when all is said and done, the cost of adapting to these regulations will be far greater than four pages of the April 8, 2016, Federal Register suggest.  We truly hope the benefits delivered to retirement investors will prove to be worth it.

Monday, April 11, 2016

Final Fiduciary Regs Pack Less Than Hurricane-Force Punch

I’ve never directly experienced a hurricane.  But on Tuesday April 5th, the day before the Department of Labor (DOL) officially issued its final fiduciary regulations, I found myself imagining what it would be like to stand on a coastal beach and watch an approaching vortex of hurricane-force wind and surf about to make landfall; right where I stood.  Sometimes a fertile imagination can be too much of a good thing.

Fortunately, the final rule and accompanying prohibited transaction exemptions issued by DOL appear to be less disruptive and destructive than many thought they would be, compared to the 2015 proposed rule and exemptions.  Whether this came about through inherent reasonableness within the DOL (did I really say that?), or out of fear of lawsuit or possible congressional action, is unclear, and matters little.  DOL did move the “burden” needle considerably.  Some have gone so far as to say that DOL “caved” to the pressure of opponents, and modified their guidance to the point that it lacks sufficient teeth.  I think that’s an overstatement.  But the fact that both proponents and opponents of the guidance have quibbles with the final product may be an indication that DOL found a palatable – if not applause-worthy – middle ground. DOL appears to have listened to the many written comments and the public testimony given between the April 2015 release of the proposed rule and the close of the final comment period last September.  I’ll share some examples, most of them positive.

Apart from actual content, many worried about having adequate time to adapt to the guidance after it was issued as final.  As the saying goes: “timing is everything.”  Based on the 2015 proposed regulations, many expected that compliance would be required within eight months of issuance.  Happily, that is not the case.  Although EBSA has made the guidance technically “effective” 60 days after publishing in the Federal Register, or June 8, 2016, there is a much longer period before having to actually operate within the confines of the final rule and accompanying exemptions.  As of April 10, 2017, investment firms and advisors will be governed by the conduct and disclosure rules.  A transition period from that date to January 1, 2018, will apply to a central pillar of the guidance, the best interest contract, or BIC.

The BIC creates a contractual agreement between advisors and their firms and the recipients of investment guidance.  Without going into its fine points here, it is an agreement that contractually places the interests of the investor above those of the compensated advisor, chiefly when advisor compensation may vary based on investments chosen.  A signed contract was intended to enforce placing the investor’s interests first.  Under the proposed rule this applied to ERISA plans and to IRAs and non-ERISA plans, as well.  In any situation where compensation might vary depending on investments chosen, or in distribution, rollover or transfer advising situations, the purpose of a signed contract was to enforce impartiality and fiduciary behavior.  Happily, ERISA plans were excluded under the final guidance from the need for a signed contract, DOL recognizing that ERISA already provides statutory remedies for fiduciary misbehavior.  IRAs and non-ERISA plans do not have this legal recourse, so the signed contract approach of BIC was intended to provide just such an enforceable remedy.  But the principles of the BIC, including the disclosure of potential conflicts, and procedures to safeguard against investor harm, apply in all these cases.

There are several additional changes to BIC that will simplify compliance for those firms that will use it and must meet its requirements.  Essentially any investment can be offered if the principles of BIC are met, rather than the limited investment types identified in the proposed rule.  In those cases where a signed BIC document must be executed, such as in an IRA rollover situation, contract execution can be part of an account opening process, rather than before the very first syllable of an advising communication! Existing advisory clients for whom a BIC arrangement should be in place can be handled on a negative-consent basis, without the need for a new “please sign this” interaction. Also, the need for initial one, five and 10-year projections, and annual disclosures, were removed as BIC requirements, significantly reducing the administrative and record-retention burden of the BIC as initially proposed.

Another favorable step back from the proposed rule concerns advising situations where the recipient can be expected to have enough investing expertise to recognize the difference between a sales pitch and impartial, “best interest” advising.  In the proposed rule it was termed a “carve-out,” an activity that would not be considered investment advice.  If an advisor was making investment recommendations to an ERISA plan covering 100 or more eligible participants, or a plan with $100 million or more in assets, it would be presumed that the plan representative receiving the recommendations would take them at face value, as an informed fiduciary would.  Under the final rule the 100 participant element has been discarded, and the asset threshold reduced to $50 million, allowing this exclusion to apply to many more plans. 

Great concern with the proposed rule stemmed from the stance on investment education and educational materials.  While the proposal recognized the value and non-advice nature of information on general investment and asset allocation principles, it had prohibited the mention of actual investments available in a retirement plan.  The final rule reverses this and allows an asset allocation model to include actual plan investments, but these must be official designated investment alternatives (DIAs) within the plan.  Unfortunately, there may be other investments in a plan that would be advantageous for a participant or beneficiary, but these cannot be modeled.  Worse, asset allocation modeling for an IRA investor may not include actual investments, on the grounds that there is no independent fiduciary to review and select investment choices that could or should be included in such modeling.  This is a genuine missed opportunity, and a potential handicap for IRA investors

It is worthy of mention that Health Savings Accounts (HSAs) and Coverdell Education Savings Accounts (ESAs) are covered by this guidance to the same extent that IRAs are.  There has been little mention of this in either the media or in the guidance itself.  The statutory tracing rules take us there, and advisors should be aware of this, inasmuch as some investors who are maxing-out in other savings vehicles are also saving in HSAs, with little intention of spending down the accounts in the near-term.  These investors are availing themselves of more sophisticated investments when their balances warrant it. 

More could be said about specific provisions of the final fiduciary rule and its associated exemptions.  But the point to be made here is that proposed guidance that appeared potentially unworkable, may – when all is said and done – have been transformed into a final fiduciary framework the industry can possibly live with.  More to come on this industry changing topic. 

Monday, March 7, 2016

IRS “Future State” Could be Sad State of Affairs

“Nothing is more certain than death and taxes.”  Certainly you’ve heard that expression.  These days there is a great deal of uncertainty as to the future of taxpayer relationships with the IRS.  National Taxpayer Advocate Nina Olson recently delivered her Annual Report to Congress.  In her report she refers to an IRS vision for its future role vis-à-vis U.S. taxpayers, which has become known as the Future State plan. 

Unfortunately, some of her conclusions align with our observations that suggest a more remote and less approachable – rather than a kinder, gentler – IRS.  Olson calls out proposed increases in IRS user fees, and the agency’s plans to reduce person-to-person contact and refer some common tax law inquiries to outside, paid professionals.  She sees this as likely to segregate taxpayers into haves and have-nots, those who can afford to pay for tax compliance assistance, and those who may find it beyond their means.  Olson refers to it as a “pay-to-play” policy, and uses as just one example the fee charged by the IRS for a taxpayer who needs to satisfy a tax obligation on an installment basis.  Not only is there a fee, but the IRS has proposed to make this option even more expensive.

There are other fees that provide dramatic examples of disadvantaging less affluent taxpayers.  For 2016 the IRS is eliminating its tiered fee structure for requesting relief – via private letter ruling – from the 60-day limit for completing an IRA or employer plan indirect rollover.  A number of circumstances beyond a taxpayer’s control – such as financial organization error, or ill health – can be, and often are, grounds for needing an extension of time to complete the rollover.  Some can be considered automatic, but others require IRS approval.

Last year a taxpayer with a rollover amount less than $50,000 could request such a ruling for $500.  This year it will cost $10,000; yes, that’s four zeros!  Those who can’t afford to obtain such IRS ruling relief could suffer serious tax consequences, in addition to diminishing their retirement nest egg, the accumulation of which is ostensibly an elevated public policy goal.  In its guidance outlining conditions under which such a rollover extension can be granted, the IRS cites as a guiding principle the concern that to do otherwise might be “against equity and good conscience.”  Hopefully, few of us will ever be at the mercy of the conscience that came up with this fee increase!

Lest I be accused of selectively citing only data critical of the IRS, the agency has reduced several of its fees for 2016, including those for retirement plans to correct certain failures through its Voluntary Correction Program, or VCP.  For those unfamiliar, under VCP a retirement plan sponsoring employer pays a fee, essentially owns up to the failures, and proposes to the IRS a remedy or remedies for its transgressions.  In this way the IRS both gathers fee revenue from participating employers, and in theory promotes greater plan compliance; all without expending time and expense in identifying and auditing those plans.  In virtually every case these fees decreased for 2016.  This, of course, could be interpreted as a carrot to promote even greater participation, and perhaps greater fee revenue overall.

One root of the problem seems to lie in the politics and funding war that is being waged between the IRS and Congress.  Apart from a long-term, deeply-rooted dislike some lawmakers have for the agency, there recently has been serious concern over IRS misuse of the tax-exempt organization rules to favor one end of the political spectrum over the other.  This unfavorable climate has led recent Congresses to punish the IRS with funding cuts.  In inflation-adjusted terms, the IRS has lost almost 20 percent of its budget since 2010.  This has led the agency to look for ways not only to cut expenses, but to raise revenues – apparently through raising user fees – on its own.

Not surprisingly, service levels have fallen, as well.  Although more than 80 percent of individual income tax returns are now filed electronically, compared to less than 55 percent a decade ago, a very complex tax code has led to increases – not decreases – in taxpayer requests for help on IRS Customer Service phone lines.  Such calls have increased 59 percent over this 10-year period.  And from 2014 to 2015 alone, calls to IRS Customer Service lines increased 15 percent.  Sadly, the number of callers who actually got through for help declined from 64 percent to 38 percent from 2014 to 2015.  The average time of answering, for those who got one, increased from 19 minutes to 30 minutes.  Hardly a service rate that would keep a private sector company in business for long.

Returning for a moment to the issue of increased fees, the cost for retirement plan document drafters to obtain IRS approval is proposed to go up steeply.  This includes the approval of a drafter’s basic plan document and adoption agreements.  Without resorting to a tedious breakdown, one major industry provider’s total fees for document approvals under the current Pension Protection Act restatement cost roughly $50,000, but would have cost in the neighborhood of $270,000 under the IRS’s 2016 fee schedule.  Under what authority is the IRS permitted to raise fees so egregiously?

Then there is the IRS’s unilateral decision to gut the determination letter program, basically delivering it to the industry as a fait accompli, rather than allowing input regarding its potential consequences for plan sponsors. 


Some might call this “piling on” an already beleaguered agency.  Others might say it is compelling evidence that the path we are on is not one that enhances, or even maintains, a healthy relationship between taxpayers and the agency with which they must regularly deal.  Congress and the IRS must come to an understanding that both provides adequate funding, and defines the relationship the IRS must maintain with taxpayers, both individual and business. 

Monday, February 29, 2016

Ends Seem to Justify Means for Partisan DOL

For starters, we can dispense with the notion that federal agencies are always impartial and unfailingly neutral.   We know better.  We know that the heads of federal agencies often dance to the tune played by the administration in power at the time.  To the degree they do this, they are partisan, something that in a perfect world these agencies would not be.  Of course, this phenomenon is not new.  It has been this way in previous administrations, too. 

Some will argue that it is a matter of degree, and contend that there has been more partisan teamwork during the present administration than has been the norm.  I’m not a historian, so I’ll leave that judgment to those who are.  I do believe, however, that in the process of drafting and presenting proposed regulations on conflicted advice in the retirement plan space, the Department of Labor (DOL) and Obama administration are setting a high partisanship bar for future bureaucrats to shoot for. 

The latest after-shock in the seismic upheaval these regulations represent for the industry is a report by the Senate Committee on Homeland Security and Government Affairs, chaired by Sen. Ron Johnson (R-Wisc).  Though the connection of these regulations to “homeland security” may seem tenuous, the original purpose of the agency – as the “government affairs” element in the title suggests – has historically been to oversee the efficiency, economy, and effectiveness of agencies and departments of the federal government; in particular, relationships between federal agencies in the regulatory process.  This side of its responsibilities comes a lot closer to explaining the objections found in the Committee’s report.

The report was published on February 24, 2016, several weeks after legislation was introduced in the Senate to block these regulations.  The regulations are currently in the hands of the federal Office of Management and Budget (OMB), awaiting clearance to be released as “final.”

Contention over these regulations, which would establish fiduciary standards and rewrite rules for interactions between advisers and brokers and their retirement saver clients, is nothing new. The process of proposing, collecting comments and (we hope) revising the regulations for presentation as final has been as fraught with disagreement and bitterness as any in our collective industry memory. What is new are some of the revelations in Sen. Johnson’s report, which shine light on behind-the-scenes procedures of DOL’s Employee Benefits Security Administration (EBSA), the sub-agency that owns – and would enforce – the conflicted advice regulations.

A second comment on partisanship could be made here.  The Committee chaired by Sen. Johnson is controlled by his party, the Republicans.  The report released last week is the “majority report,” which means it was not presented as the unanimous conclusions of Republicans and Democrats on this committee.  It should be said, however, that substantial criticism of these regulations has also come from the Democratic side of the aisle in both Senate and House.  How these Democrats would vote if it came down to an effort to override a veto of regulations-killing legislation is unclear.  But there is easily more bipartisan opposition to these proposed regulations than there is bipartisan support.

In fairness to EBSA and the Obama administration, this Committee report does some dot-connecting and conjecturing that could be questioned.  For example, the fact that EBSA has not demonstrated a willingness to accept some of the suggestions offered by other federal agencies, and by public and private critics, may not be convincing grounds for denunciation.  None of us takes every suggestion given to us, in either our personal or our professional lives.

But some of the report’s findings are very troubling, findings based on e-mails and other communications which – in many cases – were obtained without DOL cooperation.  In fact, in some instances these communications were obtained over opposition – even obstruction – by the DOL.    
One of the key concerns of lawmakers and the retirement industry was whether the DOL had effectively communicated with the Securities and Exchange Commission (SEC) as the conflicted advice regulations were being drafted.  This should have been important because a major share of the investments in IRAs and retirement plans are securities, and because the compensation formulas associated with securities investing have significant variability, and – frankly – the most potential for abuse.  Any attempt to regulate the process of securities investing should have closely involved the agency with the greatest securities expertise.

The DOL not only refused to provide copies of what might have been its key communications with the SEC, but evidence obtained by the Committee from the SEC paints a picture of the DOL attempting to influence SEC not to fully cooperate with the DOL; not to provide these requested communication records.  SEC staff had also pointed out numerous flaws in the regulations.  The upshot is that the DOL’s claim to have actively and substantively worked hand-in-hand with the SEC in creating these regulations turns out to be a fiction.

Another key concern has been the actual origin of the regulatory initiative.  Did it originate within the DOL, based on credible evidence that retirement investors were being harmed?  Or, did the impetus come from the White House, based on a belief that investor abuse is inevitable considering current structures for compensating advisors and brokers who give saving and investment advice?

The report highlights substantial evidence that administration staff were involved in ratcheting-up the perception that the conflicted advice regulations were needed.  A White House memo written months before DOL issued its proposed regulations, and cited in the Committee report, had argued that “aggressive regulatory action [is] necessary to remedy inadequate consumer protections on investment advice.”  As a further indication of who was likely in the driver’s seat, an e-mail from a dutiful DOL policy advisor to a White House senior political advisor declared that “we need to determine whether the available literature … and any other data we have not identified, can be woven together to demonstrate that there is a market failure, and to monetize the potential benefits of fixing it.” 


If that doesn’t sound like a solution in search of a problem, I’m not sure what would.  There are other examples in this Committee’s report on these proposed regulations that would raise still more hackles on our collective necks.  But, in the interest of not raising readers’ blood pressures unduly, I will leave it at that.

Friday, January 8, 2016

2015 a Year of Mixed Blessings

When we were youngsters, one of the lessons our parents tried to teach us was that we were unlikely to get everything we wanted.  We were to be appreciative when things went our way, but not be whiners when they didn’t.  The 2015 year now ending was just that kind of year for those who serve the retirement industry.  We have some things to be grateful for, and some things we might have preferred to have turned out differently.  Our glass may not be full, but neither is it empty, so we won’t whine unreasonably.

For much of the year the dominant story was the DOL’s fiduciary regulations, renamed – some think – for public relations purposes as the “conflicted advice” regulations.  In my nearly three decades in the retirement industry I doubt there has been another set of regulations that has generated so much public comment, whether live in public hearings or in written comments submitted to the Department. 

The polarization between opponents and supporters has been profound.  Some within the certified financial planner (CFP) community have voiced support for the proposed regulations; these advisers already consider themselves fiduciaries.  There has also been support from some retiree, consumer advocacy and public policy groups.  Many financial industry firms, affiliated industry groups, and individual investment professionals on the other hand, have been extremely critical of a fiduciary standard they fear will ultimately deprive less affluent savers of badly needed assistance.  There was also an unprecedented level of bipartisan effort in Congress to delay or thwart implementation of these proposed rules.  Many do not think they will ultimately be in savers’ best interest.

Some opponents hoped the Consolidated Appropriations Act – the must-pass federal budget legislation enacted during the week before Christmas – would provide a vehicle by which Congress could intervene via amendment, but efforts to do so were unrewarded.  Advocates of this strategy reportedly may attempt to introduce stand-alone legislation aimed directly at delaying DOL’s issuance of the final regulations.  But overcoming an almost certain presidential veto is thought to have a less-than-an-even chance of succeeding.

Such preoccupation with the proposed fiduciary regulations left the industry open to a virtual blind-side when the DOL in November issued guidance on states establishing or coordinating retirement plans for private sector workers.  Many had expected that the guidance would begin and end with automatic payroll withholding IRA contribution programs, with some states mandating them for most employers that do not establish a recognized retirement plan – however sophisticated or simple.  Instead, DOL went well beyond this, handing states a playbook for assisting businesses in establishing qualified plans. 

Under either the IRA or qualified plan regimen sketched out by DOL’s proposed regulations and interpretive bulletin, states could readily find themselves involved in functions that put them in competition with financial organizations and service providers in the public sector.  DOL, by the way, in its interpretive bulletin created what many feel is an unprecedented and inexplicable exception to its past guidance limiting the creation of multiple employer plans (MEPs).
We understand the numerous states’ clamor for guidance so that they might confidently proceed in encouraging retirement saving by private sector workers within their borders.  This, in the face of inaction by Congress to legislate options or parameters.  But it’s hard not to view this DOL state-coordinated plan guidance as anything but legislation by regulation.

One area in which reason did prevail in 2015 retirement developments is in the requirements for annual plan reporting to the IRS and DOL, via the 5500-series forms.  Proposed for 2015 plan years was a new reporting regimen for filers of Form 5500, 5500-SF, and 5500-EZ, to provide detailed information not only on plan characteristics, but on operations, testing, amending and other elements of compliance.  Apart from an unprecedented level of intrusiveness and “audit mining” in the questions on draft 2015 forms and schedules, also to be required was disclosure of preparer/client relationships.  

Just as most audacious was the matter of timing, and the lack of lead time for plan sponsors and service providers to prepare for the capture, retrieval, and outputting of the information sought in the 2015 plan year reporting cycle.  Fortunately, IRS and DOL were ultimately convinced that plans and service providers needed more time to comply, and this compliance-related information will be optional on Forms 5500-, 5500-SF and 5500-EZ for 2015 plan years.   

Exactly one week before Christmas day, Congress and the President found themselves for once pulling in the same direction and enacted the Consolidated Appropriations Act of 2016.  Within this extremely full and complicated package were some provisions affecting qualified savings programs, including IRAs, SIMPLE IRA, church retirement and 529 college savings plans, and the new ABLE accounts for special needs individuals.

Worthy of special mention is the qualified charitable distribution, or QCD, option for those age 70 ½ or older with IRAs.  This option, which has been with us under numerous legislative extensions since 2006, allows a taxpayer to donate up to $100,000 of IRA assets annually to a qualifying charity, tax-free.  It was made permanent by CAA 2016.  Instead of such taxpayers generally being limited to a charitable tax deduction up to 50 percent of annual income, the amount contributed under QCD can be as much as 100 percent of income, but no more than $100,000.

One might guess that this option would be availed by only a limited number of taxpayers.  But based on evidence from our retirement consulting practice, it was the most-asked-about provision in this legislation.  Also based on our informal data, it’s certainly not the case that every taxpayer using this option gives the maximum amount.  Far from it.  Donating under the QCD program is not “a wash” tax-wise for the giver, either.  Keeping, rather than donating the amount, would still be a net cash benefit to the taxpayer.  While the tax break may be generous, so is the charitable giving! 

One can argue that this tax provision has a cost in tax revenue that must be borne by other taxpayers.  But that can be said of just about any of the several dozen tax benefits in the Act.  Very few of these have at their core the creation of an incentive to be generous.  Among these many so-called “tax extender” provisions, this is one that a taxpayer can be proud to have taken advantage of.

Have a happy and prosperous New Year!   

Friday, December 18, 2015

DOL Stretches Credibility and Precedent in New State Plans Guidance

Several months ago, when the retirement industry was chiefly absorbed in the Department of Labor’s proposed conflicted advice regulations, a colleague commented that many would be surprised by soon-to-be-released guidance on state-based retirement savings programs.  True to this prediction, the guidance issued on November 18th by the DOL’s Employee Benefits Security Administration (EBSA) has given us all something more to ponder, and – at the risk of being called alarmist – perhaps to be quite concerned about. 

As hinted at by Labor Secretary Thomas Perez shortly before the November guidance was released, the agency issued both proposed regulations on state-mandated payroll withholding IRA programs, and also sub-regulatory guidance – Interpretive Bulletin 2015-02 – on state-coordinated ERISA-type plans.  FAQs accompanied the release, as well.  

The more than two dozen states that have taken steps toward implementing state-coordinated retirement solutions have been overwhelmingly interested in payroll withholding IRA programs.  If they proceed, most are expected to mandate that all but the smallest employers must offer such a program if they have no conventional retirement plan.  But given the political divisions that exist all the way from Washington down to local levels, whether this will happen in any given state is anything but certain. 

A small minority of states, at least until now, have shown interest in becoming involved in ERISA-style retirement plans for private sector employers and their workers.  This may change as the new EBSA guidance is digested, especially given the DOL’s very accommodating stance in Interpretive Bulletin 2015-02, offering several options for state involvement in ERISA plans for private sector employers.  This prospect should be of major concern to practitioners and providers in the employer-sponsored retirement plan space. 

It’s hard to fault state legislators and policymakers for taking the initiative on behalf of “plan-less” private sector workers within their borders.  They’ve watched the senators and congressmen they sent to Washington unable to make progress in broadening or enhancing options for their citizens to have greater retirement security.  If something is going to happen, the states’ seem to be concluding that they will have to act on their own instead of waiting for Congress.

I have to remind myself that those in the Department of Labor who drafted this guidance no doubt have good intentions and defensible motives.  They want to see more Americans better prepared to enter their retirement years with adequate financial resources.  But intentions and motives do not by themselves make good guidance or policy. 

Reasonable minds may differ regarding the things government should manage in a free market economy like ours.  But – such philosophical differences notwithstanding – is there any reason to expect that a state will do a better job of managing a retirement program than the private sector?  A number of states’ and other governmental units’ pension systems are in woeful shape.  There also is no shortage of examples of unprincipled use of political power and influence at the state level.  Can we be assured that this will not spill over into the administration of a state-sponsored retirement plan encouraged by this guidance?  One of the reasons ERISA was enacted was to provide both fairness and uniformity in the administration of retirement plans, and there is little reason to expect that every state will do an equally good job of it.

But, even if we accept the premise that state government-coordinated retirement programs for private sector workers are a reasonable way to broaden coverage and participation, there are parts of this DOL guidance that don’t pass muster.  The industry is justifiably asking how the agency could have reached some of its conclusions about acceptable state plan structures.

For instance, DOL takes the position that a state government could set up what would be called an “open MEP,” a multiple employer plan for employers that have no common interest, purpose, or ownership.  This is something that DOL has expressly and aggressively forbade in such recent guidance as Advisory Opinion 2012-04A.  In that 2012 guidance DOL maintained that in order to establish a MEP, the participating employers must have “substantial common control, ownership or organizational connections,” or “substantial economic, business or representational purpose” in common.  

Advisory Opinion 2012-04A further asserted that an unrelated coordinator of a MEP – such as a third-party administration (TPA) firm – would lack legitimacy if the only interest it held in the arrangement was for the purpose of providing benefits to the participating employers.  In that guidance DOL did, in fact, deny just such a firm’s request for approval of a proposed open MEP, citing the fact that there was “no employment-based common nexus or other genuine organizational relationship between the employers.”  This sounds like the very role that a state might be playing under a MEP option blessed by DOL in Interpretive Bulletin 2015-02. 

In legitimizing its new state-coordinated MEP option, DOL relied on a different argument in Advisory Opinion 2012-04A, one which stated that those sponsoring or maintaining the plan had to be tied to the participating employers “by genuine economic or representational interests.”   DOL now declares in Interpretive Bulletin 2015-02 that “a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP.”  Done and done!

There are also legitimate questions to be asked about the alternative DOL-approved options for state-coordinated ERISA plans.  Such as, do we want state governments deciding which service providers they will favor by including then in a state-approved retirement plan “marketplace?”  Do we want a state to sponsor a prototype plan document and offer it directly to employers, essentially competing with private sector firms that offer prototype documents and the services that go with them?

Right now, there are more troubling questions than there are reassuring answers.