Friday, March 20, 2015

“March Madness” an Apt Name for Fiduciary Regulations Battle


Perhaps it’s fitting that the country is in the period we’ve come to know as “March Madness.”  As even casual sports fans know, the term refers to the NCAA men’s and women’s college basketball tournaments.  It’s a time when basketball junkies are filling in the brackets for their friendly “it’s not really gambling” office pools, scratching their heads over the prospects of teams they’ve never heard of, and getting caught up in a fever that is the college sports equivalent of the Super Bowl. 
In the retirement industry we are generating a little March madness of our own.  I’m not aware that any Las Vegas bookmakers are establishing odds, but the players in this contest are definitely serious about the outcome.  No one will be cutting down basketball nets, or pulling a “Champions” T-shirt over their uniform when it’s over.  But without a doubt, one side or the other will see itself as the winner if it prevails. 

The contest in our industry is the battle over the Department of Labor’s proposal for defining “fiduciary” in the context of retirement plan accounts and IRAs.  In question is: under what circumstances will a financial advisor, investment advisor, or broker, be considered a fiduciary, with all of the responsibilities and the duty of care that entails?  

We have seen these same opposing forces arrayed against one another on this stage before.  In October of 2010, DOL’s Employee Benefits Security Administration (EBSA) issued proposed fiduciary definition regulations.  This guidance expanded the fiduciary definition beyond the so-called “five-part test” that has been in effect for some 40 years.  Certain advising relationships that might not have been considered “fiduciary” under the old regulations, now would be. 

The regulations applied to advising IRA owners as well as qualified plan participants, and to situations where participants might be rolling over assets from employer plans to IRAs.  Under much criticism for this expanded application, EBSA withdrew the proposed regulations in September of 2011, promising to perform a more robust economic study of the impact of these rules and to review the issues raised by public comments on the original proposed regulations.  Some cynically suggested that the decision to withdraw the controversial proposal and to re-propose it a later date was motivated by presidential and general election year politics, a time when regulatory red tape is always in the crosshairs of one party or another.
Fast-forward to today, and the oft-promised (threatened?) and several-times-postponed reincarnation of EBSA’s fiduciary regulations has now left that office.  The regulations now reside with the federal Office of Management and Budget (OMB), where such guidance typically resides for up to 90 days for “fly-specking” before eventual release. 

It seems almost as if we’re still in the midst of an election campaign, so visible, caustic and politically-charged are the energies and commentary being poured into support – or opposition – to the anticipated regulations.  The match-to-the-tinder seems to have been the Obama administration’s release in late February of a report entitled The Effects of Conflicted Investment Advice on Retirement Savings.  As is now widely known, the report contends that many retirement savers suffer substantial financial losses due to advisor conflicts of interest.  It is significant that these anticipated regulations are now widely being referred to as the “conflicted advice” regulations, a name that unquestionably is more charged than “fiduciary definition” regulations.  “Politically charged” would not be putting it too strongly. 
There have been numerous salvos fired by members of Congress in the direction of Labor Secretary Thomas Perez, including letters from the House Committee on Education and the Workforce, and the Senate Health, Education, Labor and Pensions (HELP) Committee, expressing concern that the anticipated regulations will lead to advisors abandoning many investors with small accounts, and that the EBSA regulations may conflict with fiduciary regulations that the Dodd-Frank Wall Street Reform and Investor Protection Act charged the Securities and Exchange Commission (SEC) with drafting.  These committee letters pointedly ask for proof that EBSA has attempted to coordinate its regulations with the SEC.    A bill, the Retail Investors Protection Act, has been introduced in the House that would require EBSA to defer issuing fiduciary regulations until the SEC acts first.  Meanwhile, Secretary Perez has said emphatically that these regulations will be issued.

Not all lawmakers are challenging the administration and EBSA on the advisability of EBSA going forward with release of its fiduciary definition regulations.  Elizabeth Warren, widely expected to be in the running for a nomination to the Democratic Party presidential ticket in 2016, recently used the forum of a Senate Special Committee on Aging hearing to reinforce the administration’s message that advisor conflicts of interest are hurting Americans’ retirement preparedness. 
Apart from the vigorous sparring among administration policymakers and Washington lawmakers, there are numerous pro and con analyses and opinion pieces appearing almost daily in industry and general media.  It appears that the all-too-brief calm between election cycle storms that we’ve come to expect may not be a reality this time.  Instead it’s “game on” for what could be one of the defining regulatory actions of the Obama administration – or not!

Monday, March 16, 2015

Does Retirement Saving Cost, or Pay?


February will likely be remembered in our industry for a seismic response to the Obama administration’s launch of a campaign to generate support for regulations governing fiduciary behavior in the advising of retirement savers.  We certainly have our own thoughts on the matter, as we have expressed in the past and most likely will again. 
For that reason, some may have overlooked the release by the Congressional Research Service (CRS) of a report on the largest individual income tax breaks for fiscal year 2015, which CRS has historically described as “tax costs.”  This is something the CRS has been doing for many, many years, but it is especially relevant at a time when those in Congress and in commerce have their eyes on possible major tax reform.  There is virtually no way to substantially lower individual and corporate tax rates without cutting into some of these tax provisions that now save citizens billions in federal taxes each year.  “Cutting into,” in plain terms, could potentially mean reducing the benefits of some – or all – of these and other individual tax breaks.

The lineup in this top-five roster of so-called tax costs is projected to be as follows for the 2015 fiscal year:  1) home mortgage interest deduction, $74.8 billion; 2) state and local tax deduction, $59.2 billion; 3) charitable giving deduction, $45.6 billion; 4) state and local real estate tax deduction, $34 billion; and 5) retirement savings deduction, $18.3 billion. 
It is a bit like stepping through a mine field to make comparative judgments about the value or importance of federally-delivered benefits, whether it is an entitlement like a social welfare program, or a tax break like a deduction for a Traditional IRA contribution.  Each has its advocates, and credible arguments can be made for many of these benefits.  Favoring one while questioning another exposes a person to accusations of partisanship.  But it’s part of our responsibility as citizens to make value judgments, and grapple with issues where there may not be answers written in black or white, or answers that will be universally popular. 

It is not my intention to step on any toes, but I do happen to feel that there are differences in the relative importance to our society of some of these tax benefits.  Differences, too, in which actually result in a loss of tax revenue.  One of the true “sacred cows” in American tax law is the home mortgage interest deduction for one’s principal residence.  We are generally allowed to reduce our taxable income by this amount of interest paid when we file our individual income tax returns.  This is especially beneficial in the early years of home mortgage payments, when a high proportion of that payment represents interest, and a much lesser proportion represents principal. 
Many, if not most, Americans grow up with the admirable goal and expectation of owning a home.  For some, the tax benefit of a mortgage interest deduction might be a deal-breaker when it comes to when – or whether – they will become home owners.  To date though, I haven't seen anything that would show that this would be the case for a majority of citizens.  Certainly the housing industry, and the associated professions of real estate broker, mortgage banker, contractor, insurance provider and numerous others, benefit from robust activity in home buying. 

But are tax incentives that make home ownership easier for an increment of Americans more important than preparing us for security in retirement?    A value judgment to be sure but one that at some point will likely have to be made.  The annual “tax cost” estimated by CRS for home mortgage interest deductions is four times the estimated cost in lost revenue as a result of IRA deductions and contributions to employers’ retirement plans.  Furthermore, citizens who reduce their taxable income via the home mortgage interest deduction do not pay this tax benefit back to the U.S. Treasury at some future time.  Contrast this with deductible IRA contributions and pre-tax amounts deferred into 401(k) plans which are eventually taxed when a retiree withdraws them for financial support in retirement.  Contrary to the way these retirement benefits are often characterized, they are not a permanent “cost” to the federal tax revenue stream.  Again, I do not mean to imply this tax benefit does not serve a valuable benefit but rather want to point out that comparing this to retirement benefits, is not an apples to apples comparison.
Next after the home mortgage interest deduction as a tax cost are deductions for state and local non-business taxes paid.  This amount is three times the so-called annual tax cost for retirement contributions, and is never recovered.  Charitable giving comes next on CRS’s list, and is almost two-and-one-half times the retirement number.  I have no quarrel with the importance to our society of tax incentives for charitable giving and in fact strongly believe they serve an important purpose.  But perhaps we should not impede the average American’s ability to provide for their own security in retirement – helping to insulate them from the need to rely on social programs – by reducing their tax incentives for saving, in order to deliver maximum tax benefits for charitable giving.

The same can be said for CRS’s #4 cost, from deductions for state and local real estate taxes paid.  This is twice as large as the price tag for retirement saving incentives.  Like the others, it too is a permanent tax loss, whereas most retirement saving pours back its tax “cost” when amounts are taken from these savings arrangements and included in income.
The administration’s fiduciary campaign cited at the start of this blog has been criticized for a lack of perspective.  Perspective is also needed when lawmakers consider the relationship between an imagined cost of retirement tax benefits, and the real and painful costs of having a retiree population unprepared for that stage of life.

Monday, March 2, 2015

Where Are We Bound in 2015-16?


The turn of the New Year can be a time to start fresh, which is why so many people make New Year’s resolutions, vowing to change some behavior, or in some way live differently than in the past.  On a less personal level, for workers and most businesses, it’s the start of a new tax year, and of course a time to begin reckoning with the tax year just ended. 
For those we’ve sent to Washington, D.C., to govern us, it’s an opportunity to regroup and take a fresh look at priorities for the coming session.  This year, 2015, is a pivotal one, with the seating of new senators and congressmen and the start of the final Congress with President Obama at the helm.  The dynamics have changed, of course, with both the House of Representatives and Senate controlled by the Republican Party, mirroring the potentially adversarial scenario faced by Mr. Obama’s two immediate predecessors, President Bush and President Clinton. 

Because of this shift in the balance of power on Capitol Hill, there has been lot of uncertainty over how the 114th Congress and the President will interact, and how they will be able – or not – to govern in the roughly 22 months until the 2016 presidential and congressional elections.  The Republicans now hold 247 seats in the House and 54 in the Senate, an advantage that party has not enjoyed since the 71st Congress of 1929-1931.  To start this year, the early indications are an ongoing inability to interact seems to be continuing.
One thing that did not change with the 2014 elections is the leadership of the federal agencies with oversight over tax-favored savings arrangements, such as employer-sponsored retirement plans, IRAs, Health Savings Accounts, Coverdell Education Savings Accounts, and the like.  This means that the power within these agencies has not shifted as a result of the elections, and the philosophies that might be reflected in their guidance are unlikely to be different during the next biennium. 

Having said that, however, there’s no denying that the ultimate leaders of such agencies as the Department of Labor and the Treasury Department – both cabinet functions – are political appointees.  Whether desirable or not, pressure sometimes finds its way down from the very top, through the cabinet members, and ultimately to the ranks where guidance is written and issued.  Many believe, for example, that the Department of Labor’s highly unpopular fiduciary definition guidance was first withdrawn – and then subsequently kept on hold – for political reasons in the presidential election year of 2012, and through 2014.  It now appears that at the end of this administration, a strong push to issue this guidance is at hand.
But the intersection of presidential power and regulatory action can work both ways.  Prior to the 2012 and 2014 election the White House had reason to temper aggressive regulatory actions, for fear of election losses.  That is less a concern, at least at the presidential level, since our president cannot run again for reelection.  Perhaps because of this, we have already seen bold – some would say excessively bold – moves taken by executive action.  The last two years of a president’s term are sometimes the period in which the country’s top leader seeks to leave his stamp on the nation, and it could be so with regulatory actions that are favored by the current administration.  The proposed fiduciary regulation may be a good example of this. 

One consideration that could temper aggressive executive and regulatory activism in the next two years is a weighing of the odds for the 2016 election, with the obvious concern that unresponsive or uncompromising regulatory action could weigh against Democratic candidates in both congressional and presidential elections.
Despite the difficulty of governing with a divided, polarized government, one bright spot for the coming Congress is the elevation of Senator Orrin Hatch (R-UT) to chairmanship of the Senate Finance Committee.  Sen. Hatch has substantial credentials when it comes to retirement issues, and his committee plays a key role where retirement savings-related legislation is concerned.  In the last session of Congress Sen. Hatch introduced the Safe Annuity for Employee Retirement (SAFE) Act, and it will be one of his priorities in the 114th Congress.

But don’t let that title fool you; the bill is not only, or primarily, about annuities.  Yes, the legislation advocates that retirees have access to investment options that can provide lifetime income.  In that respect it reflects the philosophy of the current qualifying longevity annuity contract (QLAC) regulations.  For example, dating back to 2013, Sen. Hatch’s bill mirrored these regulations in limiting to 25% the use of retirement assets to purchase qualifying deferred annuities.  The objective of both Sen. Hatch’s legislation and the current QLAC regulations is to enable what policy makers and lawmakers have long advocated – investment planning that takes into account guaranteed lifetime income options.  Such options are not the entire answer, but can be part of the formula in the retirement security equation.
But Sen. Hatch’s bill goes way beyond the annuity dimension.  It encourages greater use of automatic enrollment and automatic escalation of contributions in deferral-type plans.  It simplifies plan testing, reporting and disclosure.  It enhances the popular and successful 401(k) safe harbor plan, enhances the portability of lifetime income options from employer plans to IRAs, and offers numerous other positive – some might say overdue – retirement savings enhancements.

Whether these exact provisions are embraced, or refined, or in some form eventually become law, is of course uncertain.  In the current political environment an odds-maker would probably not give ANY legislation a high probability of success.  But if legislation such as this fails it won’t be for lack of vision and effort.  Sen. Hatch seems to have “the right stuff” to lead on the retirement savings front.  Whether others will have the good sense to follow is, of course, another question.

Thursday, January 15, 2015

Let’s Help Participants Invest With Knowledge, Not Ignorance


One of the ways we understand and manage the world we live and work in is through statistical analysis.  We use it to determine worker efficiency and productivity, company profitability, marketing effectiveness, and many other things.  In our field, it’s also used to measure retirement saving behavior and worker decision making, among other things. 
A recent study compiled by the mutual fund industry-serving Investment Company Institute (ICI) contained something both revealing and disturbing about the saving behavior of participants in defined contribution retirement plans.  For illustration purposes several bar graphs from the study ICI Survey of DC Plan Recordkeepers are reproduced below.  They compare the years 2008 through 2013. 



If anyone needs a reminder, 2008 was the year when the stock market took a bungee-jump dive that reflected an economy as close to a second Great Depression as most of us ever want to see.  Fear of a financial meltdown gripped the country, and government and private industry together looked for ways to shore up the battered economy and restore some semblance of confidence.
Uncertainty and fear generated by business failures, wage stagnation, job losses, and securities market declines of as much as 40% were eventually reflected in retirement plan participant behavior.   Not necessarily informed or wise behavior, however. 

Perhaps most understandable of plan participant behaviors is “withdrawals,” including both in-service and hardship withdrawals.  In 2008 these were taken by a larger percentage of participants than in any subsequent year through 2013.  The incidence of withdrawals in 2008 was more than 10 percent higher than any other survey year.  The study does not specifically claim that this higher distribution rate was due to job loss, wage or salary cuts, a decline in value of other participant assets, or any specific factor.  But hard times and withdrawal of retirement assets often go hand-in-hand.
Similar to increased distribution activity in its retirement security implications is ceasing contributions.  This, too, occurred at a higher rate in 2008 than any other year through 2013.  Many also ceased contributing in the following year, 2009, when the ugly economic realities of the recession were continuing to manifest themselves.  As with withdrawal motivators, such factors as job loss, wage or salary cuts, or a decline in value of home or other participant assets – even just the fear of potential economic adversity – may have contributed to participants stopping contributions. 

There are a couple of other measures of participant behavior that might not alarm others as much as they alarm me.  To me they reflect participants lacking an understanding of informed investment behavior.  It concerns the changing of allocations in participants’ existing account balances and their new contributions. 
There will always be allocation changes, and should be, as participants age and – we hope – become more adept investors.  But in 2008 the rate of investment reallocation in existing accounts was 28 percent greater than the average from 2009 through 2013.  For new contributions, 2008 reallocation changes were 32 percent greater than the 2009-2013 average.  Anecdotal evidence tells us that most of these reallocations went to more conservative investments, such as cash-equivalents like money market funds, or guaranteed investments. 

Participants who exited from equity investments when they were at their lowest ebb in 2008 or 2009 essentially “locked in” their losses.  Those who held on and rode the wave back to where the markets are today in all probability recovered their losses.  Some may have seen the opportunity that a severe market decline can offer, and not only held on, but continued or even accelerated their contributions to historically solid – but temporarily depressed – investments.  They are the real winners. 
The point of this dialogue is that far too many plan participants – when faced with a market reversal – behave like poorly trained soldiers confronting their first battle.  Rather than hunkering down and preparing to weather the siege of a market decline, they panic, cast off their good judgment and head for the imagined security of a non-volatile investment.  Some may never again move back into the types of investments that have the potential to generate real long-term growth. 

Of course, some participants may be in that near-retirement stage where they should be in conservative investments.  But that’s not an excuse for the many who are in early or mid-career and have a long time horizon to retirement.  We need to do a better job of educating all participants so that investment decisions are driven by knowledge and reason, not ignorance and fear. 

Friday, December 12, 2014

Some Roth is Good; “More” May Not Be


One of the “grand old men” of the U.S. Senate in the modern era was William Roth, the late lawmaker from Delaware.  Senator Roth championed tax-advantaged retirement savings options to assist American workers in preparing for a secure retirement.  The Roth IRA, provisions for which were enacted in 1997 and became effective in 1998, was named for him as a tribute to this legacy. 
The chief characteristic that distinguishes the Roth IRA from the familiar Traditional IRA is the absence of a current-year tax deduction, while offering the potential for tax-free earnings in the future.  This benefit is earned after a five-year period, and when the taxpayer satisfies one of several other qualifying conditions, which include reaching age 59 ½, making a first home purchase, becoming disabled, or upon death.  Fast-forward to today, and we see an expansion of this concept to include “designated Roth contributions” in 401(k), 403(b) and governmental 457(b) plans.  This option allows the deferral contributions withheld from employees’ paychecks to be treated in the same way as Roth IRA contributions.  There is no current-year benefit in the form of an exclusion from taxable income, but there is similar potential for tax-free earnings after five years.  “Tax-free” earnings is a benefit available almost nowhere else.

In addition, not only can contributions of a Roth nature be made, but existing pre-tax balances in Traditional IRAs and employer-sponsored retirement plans can be remade and given Roth status by a process called “conversion,” or “in-plan Roth rollover” in the case of employer plans.  When that happens – when these pre-tax assets are converted to after-tax amounts – tax revenues are generated, but the new Roth assets begin generating earnings that could eventually be tax-free.
The driving force behind the Roth concept in IRAs and deferral-type employer plans was not some Santa Clause-like generosity on the part of senators and congressmen.  The motivation was the effect that these contributions had – or didn’t have, to be more accurate – on the federal budget process.  Congress typically tallies up or “scores” the tax consequences of a bill within a five or 10-year time horizon, or “window.”  Tax deductions or tax exclusions result in an on-paper loss of federal tax revenue, and can complicate budgeting.   But when retirement saving is done on an after-tax basis like the Roth concept represents, immediate tax revenues appear undiminished, and can be assigned by Congress to other uses. 

Magnifying this effect, the conversion of pre-tax IRA or employer plan amounts to Roth status actually generates new tax revenue in the year the transaction occurs.  This has been used as a tax-generating device by Congress on more than one occasion.  The Tax Increase Prevention and Reconciliation Act (TIPRA) was signed into law in 2006.  In order to generate more tax revenue Congress opened wide the door to conversions, eliminating – beginning in 2010 – the $100,000 taxpayer income ceiling for Roth IRA conversion eligibility.  Furthermore, Congress offered an attractive incentive to complete a conversion.  The taxation of conversions executed in 2010 could be split equally in 2011 and 2012, the objective being to drive additional tax revenue into those years to offset other budget items. 
The Roth concept also figures heavily in proposals for future tax reforms.  Outgoing House Ways and Means Committee Chairman Dave Camp has laid out the most comprehensive tax reform proposal to date, one of whose stated purpose is to reduce individual and corporate tax rates.  To “pay for” these reduced tax rates, many existing tax deductions and exclusions could be reduced, or eliminated.  For example, Camp recommends eliminating the tax deduction and all future contributions to Traditional IRAs, and allowing all taxpayers – even those of highest incomes – to make Roth IRA contributions instead.  Rep. Camp also proposes allowing Roth-style contributions to SIMPLE IRAs, and requiring large employers sponsoring 401(k)-type plans to limit pre-tax deferrals to half the statutory limit. 

The goal of this proposal is to drive more saving into Roth arrangements, and thereby greatly limit taxpayer deductions or exclusions from current-year taxation.  The upside for taxpayers, and there certainly is one, is potential tax-free earnings in the future – after meeting the previously-described conditions for qualified distributions. The downside for the federal budget is a significant reduction in future tax revenues.  While tax reduction is a definite public good in many ways, there are certain national needs for generating tax revenue, well beyond various entitlements that may – or may not – be prudent spending.  National defense, Social Security, transportation infrastructure, science and technology, education and certain other expenditures, may be necessary to keep our nation strong and competitive.  These, by their nature, are funded through taxes, whether we like it or not.  Eliminating or reducing a significant source of these future revenues is concerning and may be a case of "kicking the can" down the road and leaving it for someone else to solve potential future shortfalls. 
Some Roth in the mix of retirement savings options is definitely a good thing.  But it’s also important for lawmakers to be forward-thinking enough to consider future needs for fair and necessary taxation, rather than focus only on short-term solutions to our federal budget dilemma.

Thursday, November 20, 2014

What Might Mid-Term Elections Mean for Retirement Saving?


Charles Dickens could have been describing the biennial American election cycle when he set down the opening lines to A Tale of Two Cities: “It was the best of times; it was the worst of times...”  The months leading up to the first Tuesday in November every two years remind us that we’re part of a great experiment in self-government, clearly a “best,” as many systems of government go.  But the debates, the partisan media dialogues, and the advertising of the political seasons sometimes remind us that politics can bring out the worst in us when it comes to decency, honesty, and respect for differing opinions. 
That said, when we consider the alternative – a system without citizen choice – there’s no question that our imperfect system is preferable to the alternatives.  Now that the nation’s voters have spoken, and the U.S. Congress has realigned with the Republican Party in the majority in both House and Senate, what might it all mean for legislation in general, and retirement plans and retirement saving in particular? 

Unlike a novel, we can’t sneak a peek at the final pages to see how this drama may end.  More like a TV series approaching a finale, the writers and directors – our lawmakers in Congress – are still scripting the outcome.  Even the lawmakers don’t know how things will play out.  Will we see a major overhaul of the Internal Revenue Code?  Will current tax incentives to save for retirement be maintained, or will they be cut back to provide revenue to balance a chronically strapped federal budget?  Or will stalemate continue on Capitol Hill, with a Congress controlled by Republicans and a Democrat in the Oval Office?  
Some optimists feel that a Republican Senate and a now-more-overwhelmingly Republican House may want to prove to the electorate before the 2016 presidential election that they can get things done.  In the Senate, that will require some degree of cooperation with Democrats, who can still block most actions with a filibuster, since Republicans do not hold a filibuster-proof majority of 60.  House of Representatives Speaker John Boehner, with a more solid majority in that body, may have less need to fear mutiny within his party ranks, and as a result may be willing to advance legislation that has at least some nonpartisan appeal in order to attract the support of some Democrats. 

Speaker Boehner knows that passing legislation in the House is not enough to get a bill to President Obama’s desk.  It must also pass in the Senate, and Democrats there will likely be very willing to filibuster legislation they can’t support.   President Obama, conscious of his legacy as presidents usually are in the waning days of their leadership, may want something to show for his final two years in office.  This would certainly require that he meet Republicans halfway on any legislative initiatives, foreign or domestic. 
Some are less optimistic.  Pessimists point to new Republican senators coming from solidly red states, and having decidedly conservative rather than moderate credentials.  Some of the Democrats who lost, like Senator Mark Pryor of Arkansas, were middle-of-the-road lawmakers who tended to work across the aisle.  Result?  Some feel it will be a more partisan Senate than before the election.  Reinforcing this is the fact that Republican campaigns in this cycle ran against President Obama as much as against the Democratic incumbent, and won – at least in part – by linking that incumbent to the President.  How willing will those electorate-conscious newcomers be to support legislation that might be moderate enough to attract a presidential signature, rather than a veto? 

But incumbency is a two-edged sword, and while a recent Associated Press poll showed only 30% of interview subjects were satisfied with the job being done by President Obama, only 25% said they were satisfied with the Republican Party as a whole.  The Democrats enjoy similarly low stock as a political party.  That sounds like anything but job security.  These days simply being in office is enough to make you unpopular, and those who have just been elected will have to face their constituents again in the next cycle.  That might be enough to temper uncompromising partisanship, but that remains to be seen.
Being optimistic, let’s assume that the 114th Congress being seated in January of 2015 will find it possible to work together occasionally, and bring at least some legislation to President Obama’s desk for signature and enactment.  What might that legislation look like?  If it doesn’t happen during the lame duck session between now and the 2014 adjournment, one area of likely agreement is a group of expiring tax provisions that have come to be known as “tax extenders.”  There are many, and include such things as a research and development credit, alternative energy generating incentives, and the IRA qualified charitable distribution, the latter allowing taxpayers age 70 ½ and older donate up to $100,000 per year tax-free to charitable organizations.  That has enjoyed bipartisan support in the past, and probably will again.

While many of both conservative and liberal leanings believe that a comprehensive rewrite of the tax code is needed to restore simplicity and fairness, it will be anything but easy.  Several constituencies have a big stake in maintaining major elements of the current tax code.  The home mortgage interest deduction, the exclusion for employer-provided health insurance, and deferred taxation of retirement savings – to name three of the most high-profile – are highly valued.  Giving them up, or seeing them seriously restricted, would not be readily accepted. 
In order to reduce individual or corporate tax rates – oft-stated goals of tax reform – restricting these or other targeted tax incentives has often been proposed as a way to free up the necessary fiscal resources.  The only major tax reform proposal to come out of the current Congress, proposed by retiring Ways and Means Committee Chairman Dave Camp, included major new restrictions on retirement savings tax incentives.  Curbing these incentives to some degree has been mentioned in virtually every serious discussion of tax reform.  Retirement saving  tax incentives are definitely in the budget-balancing crosshairs, even though they serve a very, very important purpose in American quality of life.  Hopefully that can be made clear to lawmakers, if they ever get to the point of deliberating tax reform.

“If” seems to be the operative word.  In a post-election analysis published by USA Today, a University of Minnesota political scientist predicted continued partisan strife in Congress, believing that we will see “…even more bitter, partisan, white-knuckle politics.”  We surely hope that he’s wrong for the sake of good governance of our country.  For retirement saving, on the other hand, perhaps the status quo is not so bad.

Friday, October 17, 2014

What are EBSA’s Plans for Brokerage Windows?


The Department of Labor’s Employee Benefits Security Administration (EBSA) has had brokerage windows on its radar since the agency issued final regulations on investment and fee disclosure for participant-directed retirement plans in October of 2010.  The latest evidence is EBSA’s request-for-information (RFI) in August of this year asking for public comment on these investing arrangements in individual account-type plans, such as 401(k)s.  EBSA is asking the public and those in the industry a series of “39” questions, the stated purpose being to determine “… whether, and to what extent, regulatory standards or other guidance concerning the use of brokerage windows…are necessary to protect participants’ retirement savings.” 
For the unfamiliar, a brokerage window in a retirement plan is a portal through which a participant can select from a virtually limitless array of investment choices; much broader than a typical selection of investments available to retirement plan participants.  It is an option we most often see used by experienced investors who are motivated to research and inform themselves on both conventional and unconventional investments, and do not want to be restricted to a preselected menu of mutual funds, annuity products, or other traditional investments. 

A year and a half after issuing its 2010 investment and fee disclosure regulations, in May of 2012, EBSA issued field assistance bulletin (FAB) 2012-02 to add clarity to these regulations.  FAB 2012-02 contained more than three dozen items in question-and-answer format.  Based on EBSA’s approach in FAB 2012-02, many felt the agency viewed brokerage windows as a “bogey” on their radar, something to aim for with their regulatory armament.

Under EBSA’s regulations and FAB 2012-02, employers are required to identify specific designated investment alternatives – DIAs—and provide for each of these such details as investment performance history, expense ratios, risk-and-return characteristics, and fees.  But EBSA went beyond the reach of its regulations in FAB 2012-02.  The agency attempted to adapt the legitimate DIA disclosure requirements in the regulations – which are suited to specific individual investments – to the brokerage window option, which can offer almost limitless choices.  FAB 2012-02 proposed rules for brokerage windows that would have required a level of participant investment monitoring virtually impossible under current platforms. 
FAB 2012-02 set arbitrary thresholds for participant choices of investments that might be made through a plan’s brokerage window.  If enough participants chose a particular investment through that brokerage window, that investment would become a de facto DIA, with all of the information gathering and investment disclosure requirements that entails.  Why?  EBSA has repeatedly expressed a suspicion that plans may identify few – or no – DIAs, and establish only a brokerage window, in an effort to circumvent the disclosure requirements for DIAs.   

I see two problems with this vein of thought.  First, brokerage windows investments are typically reported to retirement plan recordkeepers and administrators in aggregate amounts, not in discrete “by-the-investor” totals with transaction activity.  Those providing recordkeeping services simply do not have the ability to link to all the possible brokerage options a plan participant may choose from. In other words, FAB 2012-02 was asking for information that was essentially beyond the ability of the industry to obtain, and plan administrators could scarcely comply.  This is information, by the way, which the individual participant does get from the self-directed brokerage provider.  This led to a major backlash of industry opposition.  As a result of the reaction, EBSA at least temporarily changed course, issuing FAB 2012-02R in July of that year to give brokerage windows an exemption from being treated as a DIA. 
Second, I haven’t seen evidence of any trend toward plan sponsors offering a brokerage window to the exclusion of DIAs.  Ascensus provides recordkeeping services to some 40,000 retirement plans, and a query of these plans’ features left us hard-pressed to find any plans, other than owner only plans, that offered only a brokerage window for plan investing.  As we’ve said before, this heightened level of EBSA concern can be characterized as a solution in search of a problem – a perceived problem that from my perspective appears not to exist.

Despite backing down in FAB 2012-02R, EBSA left the door ajar for possible future action.  The close of FAB 2012-02R stated that “The Department intends to engage in discussions with interested parties to help determine how best to assure compliance with these [fiduciary] duties in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.” 
The DOL’s Semiannual Regulatory Agenda released in May of this year listed “Standards for Brokerage Windows – PreRule” as a priority. This agenda item was fulfilled with EBSA’s August RFI.  A reading of the 39 questions and their subparts does not give comfort to those who fear that EBSA is committed to restricting the use of brokerage windows, one way or another.  Let’s just hope that the agency was sincere when it used the term “practical” in the sign-off to its FAB.