The View’s Not So Clear Through This (Brokerage) Window

Update as of 7/30/2012:   DOL Withdraws Controversial Investment Disclosure Position discussed in this blog. 

At the time of this writing, our industry finds itself between two weighty compliance responsibilities.  The deadline for retirement plan service providers to disclose fee and expense information to plan fiduciaries, which was July 1, has come and gone.  Ahead, with a deadline of August 30, is the required disclosure to participants and beneficiaries in participant-directed individual account retirement plans.  These twin duties have ushered in new levels of information sharing, and heightened responsibility for plan fiduciaries and service providers.   

The Department of Labor’s Employee Benefits Security Administration (EBSA) has given the industry some guidance for complying with these two disclosure obligations, which originate in separate final regulations.  Field Assistance Bulletin (FAB) 2012-02 was issued May 7, 2012, and contains 38 Questions-and-Answers on these disclosure obligations.  Many of them are directed toward disclosure to participants and beneficiaries, the disclosure obligation that lies ahead.    

As beneficial as this guidance has been in many respects, some feel it also contains regulatory overreaching, or legislating by regulation.  Perhaps the most troubling example in my opinion is some of the guidance on the use of brokerage windows for plan investing.  A brokerage window in a retirement plan might be described as a portal through which a participant can select from a much wider universe of investment choices than, for example, the typical selection of mutual fund investment options many plans use.  It is an option we see most commonly used by the more savvy investor, whereas a typical plan participant is more likely to split investments among several risk categories within a menu of mutual funds or other similar investment types. 

It wasn’t surprising that the fee disclosure regulations and the FAB require that plan fiduciaries provide adequate information on how a brokerage window investment arrangement works.  Information such as how to give investment instructions, any restrictions or limitations on trading, how a brokerage account differs from a plan designated investment alternative (DIA), and general fee and expense information, are certainly legitimate requirements. 

 Specifically at issue, however, is whether the same level of information gathering and sharing that is required for a plan’s DIAs – such things as investment performance history, expense ratios, risk-and-return characteristics – must also be provided for investments selected through a brokerage window arrangement.   The conditions set forth in FAB 2012-02, Q&A #30, make the answer a “maybe,” and as a result, will make compliance an uncertain moving target for plans offering a brokerage window arrangement.    

Q&A 30 begins innocently enough, acknowledging that under the final regulations a brokerage window generally need not be treated as a DIA, with all the disclosure that entails.  Q&A 30 further states that the regulations do not specify that a plan must have “a particular number of designated investment alternatives,” but then goes on to say that “the failure to designate a manageable number of investment alternatives raises questions as to whether a plan fiduciary has satisfied its obligations under section 404 of ERISA. “  

Further, Q&A states that “Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives.”  What is ironic is the fact that a brokerage window option is intended for, and primarily used by, the more experienced –  the “sophisticated” – investor.  It is typically made available in order to broaden an otherwise limited array of investments, and put control and decision making in the hands of the plan participant. 

Under the terms of Q&A 30, if a plan’s brokerage window includes more than 25 investment alternatives, the plan’s fiduciaries must

• Provide DIA-level disclosures for at least three investments available through the window that meet the “broad range” requirements in the ERISA 404(c) regulations, and
• Provide DIA-level disclosures for any investment available through the window that is selected by five (5) or more participants and beneficiaries (selected by 1% or more of participants in plans of more than 500).

The DOL indicated that their rationale for this requirement was their belief that plans might offer only a brokerage window option to  participants as a way to circumvent requirements to provide disclosures on any plan DIAs.  What is a bit concerning to many is what seems to be a lack of a demographic information that would indicate whether or not this type of practice actually occurs.  Our concern is that this DOL guidance casts a large net that will snare plans that offer a sufficient number of DIAs, as well as what we believe is a very small number of plans that choose to offer only a brokerage window.

The retirement industry has reacted to Q&A 30 with a wide variety of responses, most indicating some level of concern over this requirement, both from a timing and content perspective.    The DOL has stated that the industry is “over reading and overreacting ” to Q&A 30.    They have stated that a plan  fiduciary’s duty includes both the decision as to whether to offer a brokerage account,  and a duty to monitor what’s happening with it.  DOL further states  that the duty to monitor what is happening within the brokerage window has always existed.   Many in the industry were somewhat surprised by this, and take the position that this is really a new requirement they were not aware of. They argue that the FAB goes beyond the intended purpose of an FAB and is actually regulating, absent the normal regulatory process.       

An additional  concern many in the industry have is whether or not plans or their service providers can readily track when, or if, they reach the participation thresholds that will trigger the DIA disclosure requirements.  Many believe most plans do not have this capability, and obtaining it will be a laborious and expensive proposition.  Certainly at this early stage of the new disclosure process there doesn’t appear to us to be much evidence that plans are circumventing the spirit of the regulations by offering only brokerage window investing. 

It’s seems Q&A 30 may be a bit of a solution looking for a problem.  Perhaps most disconcerting to many is the release of a requirement that was not even hinted at in the final regulations, and very late in the fee disclosure implementation process.   Additionally, Q&A 30 may put plan fiduciaries in an untenable position.  Already we’re hearing of plans that have been advised not to offer a brokerage windows option, for this very reason.  In the end, it may be plan participants and beneficiaries who lose a potentially valued investment option for the sake of DOL preventing a problem that does not exist.

Retirement Saving at a Crossroads

(Dear readers: this is the first of what I expect will be many entries in an online journal on the state of our retirement industry.  In today’s world of almost limitless communication and networking possibilities, we have an opportunity not only to better understand and react to our world and developments in our field, but to help shape them.  That is one of the reasons for this blog.  The “broth” of economic challenges, political divisiveness, and our aging population, seem to many to be a recipe for uncertainty; for some, even pessimism.  Remaining informed, and in turn informing others, is our best hope for a future in which Americans can be confident that their retirement years will be a blessing, rather than a burden.  As a retirement industry professional with a quarter century’s perspective and experience, surrounded by many associates in a company committed to that goal, I believe we can make a difference, and help shape a brighter future.  Todd Berghuis, Senior Vice President, Ascensus Retirement Services.)

It is certainly ironic that as American workers find themselves at a low point in confidence about a secure retirement, Congress is holding hearings to consider whether to preserve – or to radically alter – federal tax incentives that encourage retirement saving. 

On April 17, 2012, the House Ways and Means Committee held a hearing on the retirement saving incentives in the Internal Revenue Code.  Testimony was given on plan complexity, effects on the federal budget, and reasons why past Congresses enacted the saving incentives we now have.  While there are not currently bills being actively debated in Congress that would reduce or eliminate the tax preferences for IRAs and employer plans, there have been strong indications from lawmakers who want to cut federal expenditures – or greatly revamp the Tax Code – that retirement saving incentives will be “on the table” as they look for ways to balance the federal budget or restructure the Tax Code. 

At the same time as this discussion is occurring, Americans’ confidence in the likelihood they will have a secure retirement has declined markedly.  Evidence of this comes from the well-respected Employee Benefits Research Institute’s annual Retirement Confidence Survey (RCS), which polls Americans on their confidence in having a secure retirement.  This year the RCS registered a significant drop in confidence from just five years ago.  There has been a marked decline in both workers and retirees identifying themselves as “very confident” of “having enough money to live comfortably throughout … retirement.”  There has been a simultaneous increase in those “not at all confident.”    

Among active workers in 2007, which was prior to the current economic downturn, 27 percent identified themselves as being “very confident” of having a comfortable retirement.  Only 10 percent responded that they were “not-at-all confident.”  A striking reversal occurred in 2012.  Only 14 percent of active workers now responded that they were “very confident,” and 23 percent are now “not at all confident.”  For retirees, the numbers describe a similar loss of confidence.  The “very confident” dropped from 41 percent in 2007 to 21 percent in 2012.  The segment “not-at-all confident” rose from 11 percent in 2007, to 19 percent in 2012. 

This loss of confidence is also reflected in many of those who are now retired having worked longer than they expected, or wanted, and many who are still working today saying they are adjusting their expectations, believing they’ll not be able to retire when they hoped to.  Unfortunately, some factors that impact the timing of one’s retirement —like health and employability—may be beyond the worker’s control.  For this reason, too, having maximum retirement saving opportunities is crucial.

Some in Congress look at the tax preferences for IRAs and employer plans, and unfairly call them “tax expenditures,” suggesting that they represent lost tax revenues.  The reality is that taxation is merely delayed to the time of retirement for most such accumulations.  Nevertheless, some lawmakers believe that scaling back these tax preferences, or eliminating them altogether, would make available more revenues for the tax reforms they favor. 

But at what cost?  Confidence in a secure retirement is already diminishing, as the RCS survey shows.  What are the prospects for a secure retirement if Congress weakens or eliminates the current tax incentives to save for that final stage of life?  Hopefully, what is good for our citizens long term retirement needs will not be sacrificed for political advantage and change-for-change’s-sake in the short term.