It’s not every day that one finds solid evidence that protest and activism can make a difference. But the Department of Labor, Employee Benefits Security Administration (EBSA), recently proved that protest and activism CAN be rewarded, when that agency modified a very controversial item of guidance for retirement plans. Plan administrators and fiduciaries heaved a huge, collective sigh of relief on Monday, July 30th, when EBSA issued Field Assistance Bulletin (FAB) 2012-02R, which superseded FAB 2012-02—issued less than three months earlier.
As I mentioned in my previous blog, FAB 2012-02’s Q&A 30 caused great concern as many believed it imposed on retirement plan sponsors a disclosure obligation both impractical and unsupported by any governing regulations. One would have to look long and hard to recall another item of retirement plan guidance, issued by either the DOL or the IRS that has been so widely and uniformly questioned and that generated as much controversy in such a short span of time. Questioned not only by those within the retirement industry itself, but also by congressmen and senators, collectively and individually, who have an understanding of the financial world of which retirement plans are an integral part.
At the heart of the matter was a very unexpected FAB 2012-02 position on the investment option known in the industry as a “brokerage window,” which can open up an almost unlimited array of investments to participants. Q&A #30 of FAB 2012-02 stipulated that under certain conditions a plan would be required to track the multitude of underlying investments that can be chosen within a brokerage windows option; if a certain number of participants and beneficiaries chose a particular investment, then the most comprehensive investment disclosure requirements of the regulations—requirements intended only for specific, designated investment alternatives within a plan—would be triggered.
This disclosure includes such things as investment performance history, expense ratios, and risk-and-return characteristics. These are easily available for specific, designated investment alternatives within a plan. But EBSA seemed oblivious to the fact that brokerage window investment reports to plans do not provide the investment-by-investment detail necessary to determine how many participants or beneficiaries hold a particular investment. And, perhaps more to the point, there are no provisions in the governing 404(a)(5) regulations that call for such tracking and disclosure for brokerage windows investments. There is evidence that plans were being advised to steer clear of offering the potentially very desirable brokerage window investment option, for fear of running afoul of EBSA’s initial guidance.
Brokerage window disclosure compliance is now laid out in Q&A 39 of revised FAB 2012-02R (as opposed to Q&A 30 in FAB 2012-02). No longer will the number of investments on a brokerage window investment platform, and the number participants and beneficiaries who choose a particular investment through this window, trigger a need for the disclosure detail necessary for designated investment alternatives (DIA) under a plan. Instead, Q&A 39 of FAB 2012-02R reminds fiduciaries of plans offering brokerage investment windows of their “statutory duties of prudence and loyalty to participants and beneficiaries,” which includes, prudently selecting and monitoring the provider of the brokerage window.
The industry response on this issue was not, in my opinion, inspired by self-interest or over-reaction to being regulated, but rather the concerns raised were a healthy, justified response to the view that the DOL was changing the rules after the game was in progress. While the DOL may, and in fact likely does view the self-directed brokerage option as an issue it needs to examine further, we see a great deal of evidence that plan administrators, fiduciaries, and service providers have conscientiously attempted to comply and conform their practices and business models to the two current sets of disclosure regulations now in force, those under 408(b)(2) and 404(a)(5). We hope this becomes apparent as the process of disclosure continues to unfold, and that the DOL and the retirement industry can work together for the common purpose of enhancing the nation’s retirement security.
