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.

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 114^th 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.

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.

Let’s Enable More Edelivery

The electronic data revolution has been a blessing in many, many ways.  It has had a few bumps in the road, to be sure.  Data breaches in the systems of major retailers have put sensitive customer data at risk.  We’re all familiar with the communications monitoring and data sharing that has taken place between phone and internet providers and government agencies, which some of us find troublesome from a privacy standpoint.  Theft of laptops, hacking of computers, and high-profile security leaks by so-called whistleblowers are further examples of the risks involved when information is stored electronically.

That said, very few of us would want to go back to paper shuffling and hard-copy transmission, storage and retrieval of information where we don’t have to.  Losing the electronic efficiencies we now almost take for granted would be like stabling a horse in the garage instead of a sedan or an SUV, and feeding hay and grain instead of gasoline.  From internet banking and investing to online purchasing, just about any action or transaction you can name has – or likely soon will have – an electronic dimension or means to execute.  I suspect that very few of us would really want to roll back the clock.   

The world of retirement plans is pretty comfortable with electronic functions, too.  A 401(k) plan participant can change investments, request a distribution, apply for a plan loan, and generally interact with their employer’s plan at its web site with a few keystrokes.  The tax return of a retirement plan, Form 5500, is typically submitted electronically to the Department of Labor on behalf of the sponsoring employer.  The same is true of the information returns that track qualified plan and IRA transactions, Forms 1099-R and 5498 among them. 

But not all dimensions of retirement plan administration are as electronically streamlined as they could be.  One example is what I believe to be the unnecessarily conservative posture of the Department of Labor’s Employee Benefits Security Administration, which we know more familiarly by its acronym EBSA.  In many electronic communication situations in the wider world there is a presumption that information will be delivered electronically.  If a person wishes to receive that information in paper form they must indicate this.  If they fail to do so, they are “defaulted” to electronic delivery.  This is the “new normal” in a great and growing share of communications in modern commerce.

EBSA’s preference – reflected in its regulations governing electronic delivery of retirement plan communications of many kinds – requires that plan participants and beneficiaries affirmatively declare their willingness to receive notices, election requests, summaries and other information, electronically.    Many in our industry, myself included, believe EBSA should be more flexible and more in line with the rest of financial industry in this area.  Given the inclination of many people to put off decision making, or to fail to take action simply out of inertia, it is likely that the lack of an election to receive communications electronically is not necessarily a rejection of that form of delivery.  An argument often made in favor of more automatic enrollment and automatic escalation of deferrals in 401(k) plans – without affirmative election beforehand – is that people often simply fail to act, for no good reason and that this "negative" consent method results in increased participation.   This same logic seems to apply to other plan related communication as well.

I’m not oblivious of the need for safeguards to avoid harming the interests of participants and beneficiaries who are unable or unwilling to receive plan communications in electronic form.  Their rights must be protected, and not everyone chooses to do things in the most modern and up-to-date way.  The option to request things in paper must be preserved.  But it is worth noting that the IRS is onboard with a more streamlined, almost negative consent method for electronic delivery of some important plan communications.  It's clear EBSA seems not to be.  I believe EBSA should take another step into the modern electronic world and relax its current electronic delivery requirements.

IRS Verdict is in, But Buyer Jury is Out, on QLACs

The Internal Revenue Service took a needed step toward making delayed or longevity annuities a viable option for retirement savers, with its July issuance of qualifying longevity annuity contract (QLAC) final regulations.  This action will make it more attractive for savers to use retirement assets to purchase longevity annuities, which begin their payment stream at an advanced age, such as age 80 or 85.  The key to QLAC appeal will be the ability to exclude annuity contract costs from required minimum distribution (RMD) calculations, and the resulting taxation that generally begins at age 70 ½ .  Up to 25 percent of aggregate IRA and employer retirement plan accumulations – not to exceed $125,000 – can be used for QLAC purchase and still be excluded from the balances that will determine taxpayer RMDs.

The question no one is able to answer at this point is how attractive this investment option will be to those with assets accumulated in IRAs or employer plans.  It is a safe assumption that it will take time for interest to grow.  Longevity annuities are not actually a new product, but until now they did not offer the tax benefits provided by these final regulations. 

Another term some use for longevity annuities is “death insurance.”  If structured to begin payout at an advanced age and to last throughout the annuitant’s lifetime, he or she can be assured that they will not outlive these funds.  A valuable assurance to be sure.  Until now, longevity annuities have typically been purchased with nonqualified assets as part of a comprehensive financial plan intended to provide for an individual or a couple throughout their retirement years. 

At the risk of over-generalizing, it is likely that the buyer of a longevity annuity is a person of above-average wealth, able and willing to part with a substantial sum to purchase a contract whose promised return does not begin until at a date that may be 10, 15 or 20 years in the future.  The younger the buyer, the less expensive the longevity annuity, but the longer one will wait before seeing a return on the investment.  In some cases, depending on how a longevity annuity is structured, there could be no return if the annuitant dies and there is no residual payment stream guaranteed to a beneficiary.  Given these realities, the longevity annuity has understandably been a niche product to date.

The QLAC, after years of congressional and public policy advocacy for it, now offers the special tax incentive of excluding the purchase value from RMD calculations.  Will workers and younger retirees seriously consider this option?  How will it mesh with today’s qualified retirement plan environment?  Will QLACs be embraced, or remain a niche investment product that lacks the broad appeal its advocates have hoped for?

It’s no secret that there is a certain amount of hesitation on the part of plans participants and IRA owners today to annuitizing an IRA or retirement plan balance.  In an earlier time when defined benefit pension plans were common, a “promise to pay” was accepted with less hesitation.  But in today’s largely defined contribution world, in which I will include IRAs, there is greater reluctance to give up control of a large sum of money in exchange for a promise to pay.  Failures of insurance companies, the source of annuities, are not an everyday event.  But high-profile insurance company failures of the past, and the late financial meltdown that led us into the recent recession, have made many savers reluctant to give up control of their assets.  A longevity annuity that does not begin payments until well into the future may take some getting used to for a lot of savers.  Even in cases where this is an alternative that should be considered. 

In the employer-sponsored retirement plan realm, with the exception of defined benefit pension plans, most participants receive lump sum payouts.  The defined contribution plan world has to an increasing degree moved away from annuitized distributions.  If a QLAC is purchased under an employer plan the assets would essentially leave that plan when paid to an annuity provider, but continue to be accounted for as a plan investment in order to enforce the QLAC purchase limits.  It’s clear that shifts in both philosophy and logistics may be needed if QLACs are to make inroads in DC plans. 

For these reasons some feel that QLACs are most likely to gain initial acceptance as IRA investments.  This, in turn, has led to speculation as to whether there could be some “asset flight” from employer plans when a plan participant eligible for a distribution wants to purchase a QLAC when it is most affordable.  For many this will be while they are still in the work force. 
With QLACs, more so than many retirement issues today, the operative expression is “more to come.”

Happy Anniversary, ERISA!

Because summer is a popular time for weddings, it’s also a time of many anniversaries.  2014 marks an important anniversary that is unrelated to marriage but most certainly marks an important commitment to fidelity.  2014 is the 40 anniversary of the Employee Retirement Income Security Act of 1974, or ERISA as it has come to be known. ERISA is the statutory foundation for the regulation and rules that retirement plans must follow to qualify for the tax benefits employers receive when they offer qualified retirement plans to their employees. 

Given the amount of criticism that has been directed at the private sector retirement system recently, some might ask whether ERISA’s 40th anniversary is something to celebrate.  We can certainly find imperfections.  But when we judge something as complex as this body of law, we should view it not with the eye of a perfectionist, but the eye of a realist.  That’s not much different than having a reasonable perspective on interpersonal relationships.  If we’re looking for perfection we are likely to be disappointed.

Very few who are working in the retirement industry today were “in the business” in 1974, the year of ERISA’s enactment.  But an objective look at the state of retirement plans before that time leads to the inescapable conclusion that things have changed for the better.  There may be shortcomings in the implementation and operation of plans under the ERISA umbrella.  But these shortcomings generally have little to do with the intent of its provisions. 

Human weakness and error, intentional or inadvertent, can lead to such failings as unsatisfactory investment choices, inappropriate fees, conflicted investment advice, fiduciary abuses like diverting retirement assets for other business purposes; even such outright crimes as embezzlement.  But such miscarriages of ethics or justice should not unfairly taint the concept of ERISA retirement plans.  There will always be vultures, scavengers and scalawags looking for opportunities to enrich themselves at others’ expense.  That’s not the fault of ERISA. In fact, ERISA is the safeguard to prevent or address these failings.  And, at least in my opinion, ERISA has addressed these pretty well.

Some bemoan the fact that we do not have in place a national retirement program that ensures lifetime benefits to all American workers, benefits like those available to the fortunate minority with defined benefit plans.  As desirable as that might be, in the private sector there are competitive economic forces that play a huge role in determining what benefits an employer can provide to employees and still remain solvent.  And taxpayer funding of such a national program and the accompanying “mandate” is certainly not politically viable at this time.

ERISA has, without question, improved the retirement security prospects of American workers.  Prior to ERISA it was not unusual for profit sharing plans to require 10 or 15 years to reach full vesting, or for defined benefit plan vesting to be reached only at normal retirement age, or upon plan termination.  There were no controlled group rules to prevent abusive business structures that favored the delivery of retirement benefits to a limited group of owners or employees at the expense of others.

There also was no insurance program like today’s Pension Benefit Guarantee Corporation (PBGC) for defined benefit plan.  An example of the consequences of this was the 1963 closure of the Studebaker automobile plant in Indiana.  Its underfunded pension plan left thousands of workers with little, if any, retirement benefits.  There was also no EBSA to ensure that defined contribution plan fiduciaries met their responsibilities of fairness to rank and file employees. 

It was more than a decade – and numerous committees, commissions, surveys and reports later – when Congress finally acted.  Some believe that ERISA legislation only got the support needed for enactment when private businesses became fearful that the states would act individually, creating a patchwork of dissimilar rules that would have made compliance difficult.  Whether such support was motivated by generosity or self-interest, the result – ERISA – was a greater degree of predictability and equity than had existed before.

U.S. retirement plans are at a crossroads.  They are considered a federal budget luxury by some who are more concerned about their perceived impact on tax revenues than they are concerned about our citizens’ retirement security.  Conversely, they are considered by others to be not generous enough, and to provide insufficient guarantees of a dignified retirement. 

Those in the middle of this political and policymaking tug-of-war are most apt to appreciate today’s ERISA-governed retirement plans for the giant positive stride in employee benefits that they represent.   There is more work to be done to lead more Americans to a secure retirement.  But ERISA is the path that has taken us a long, long way toward a highly desirable destination.

Dudenhoeffer Dust Will Take Time to Settle

The U.S. Supreme Court has spoken.  In a June, 2014, decision the Court held in Fifth Third Bank v. Dudenhoeffer that fiduciaries of a retirement plan designed to offer employer securities – an ESOP – are not entitled to a special presumption of prudence in offering employer securities as plan investments.  Specifically at issue was whether such a plan’s fiduciaries are duty-bound to restrict or remove such an investment option when the employer’s financial health is in question, and the value of its securities may be in doubt.

In the background behind the ESOP specifics of this case was the broader issue of whether offering employer securities in any qualified plan should be presumed to be prudent.  Under such a presumption, referred to as the “Moench presumption” for the case after which it is named, the burden of proof that offering employer securities is inappropriate rests with the plaintiff alleging a fiduciary breach.  But, not only did the Court rule that plans designed to offer employer securities have no special presumption of prudence, it rejected the Moench presumption out of hand.  This finding is contrary to several Appeals Court rulings that supported in principle such a presumption of prudence.    

Some have seen the Supreme Court’s ruling as a blow to fiduciaries of plans offering employer securities, expecting a rash of new stock drop lawsuits.  We, as consultants and as retirement plan recordkeepers, have already been asked by some plan sponsors how they might gracefully and in a compliant, participant-friendly manner remove employer securities as plan investments.  Although the selection of prudent investments is clearly the province of a plan’s fiduciaries, we would caution plan sponsors not to react in knee-jerk fashion and blindly remove what might be a prudent option from its investment lineup.

A close look at the Court’s ruling may conclude that it actually raised the bar and made it more difficult for stock drop cases to be brought successfully.  The Court stated in its opinion that it would not be enough for a plaintiff to allege that a fiduciary armed with publicly available information should have recognized that the employer securities being held and offered to participants were over-valued.  To successfully bring a cause of action a plaintiff would also have to plausibly present that

 - a fiduciary could have acted on its knowledge of the business’s solvency and its securities’ value – for example ceasing to offer, or liquidating, plan investments in employer securities – without  violating insider trading laws, and

 - a prudent fiduciary in the same circumstances would not have viewed such actions as more likely to harm the investment fund than to help it; meaning, that market reaction to the fiduciary’s investment changes could actually cause the value of existing investments to drop, to the detriment of participants holding those investments.

Some ERISA litigation analysts are of the opinion that these will be formidable obstacles for a plaintiff, or a class of plaintiffs, to overcome in order to prevail in a stock drop lawsuit.  It will be no surprise if we initially see a spike in the number of lawsuits alleging impropriety in offering employer securities as plan investments.  But it may be that only when lower courts have applied the standards in the Supreme Court’s opinion that we can draw conclusions about the prospects for the success of such litigation in the future.  

Be Cautious of Offers to Pass the Fiduciary Buck

The term “fiduciary” is certainly one of the lightning-rods of these times in our industry.  In a period of intense scrutiny of the management and operation of retirement plans, and the arrangements between plans and those who provide services to them, to be a fiduciary is to be under a regulatory and legal microscope.  One need look no further than the dockets of our district and appeals courts, or the news releases published by the Department of Labor (DOL), to conclude that a great deal of time and energy go into policing retirement plans.  Unfortunately, even the most honest and well-intentioned plan administrators and service providers can be exposed to lawsuits or regulatory sanctions for outcomes seen as or alleged to be damaging the interests of benefit plan participants.  And, when the layers of the legal or regulatory onion are peeled away, “fiduciary” is as often as not at the core.

The most high-profile regulatory event of these times is the effort by the DOL’s Employee Benefits Security Administration (EBSA) to issue regulations defining who should be considered a fiduciary with respect to retirement plans, and the standards to which they will be held.  These regulations have several times been delayed, and it is unclear when, or if, they will ultimately be issued.  But, with or without such regulations, the mandates of the Internal Revenue Code and ERISA, and the eagerness with which lawsuits alleging fiduciary breaches are filed, already are enough to make potential plan fiduciaries uneasy. 

Given the demonstrated responsibility and related risk in being a fiduciary to a retirement plan, it’s not too surprising that some enterprising individuals and companies are offering themselves as solutions to this risk.  And, also not surprising, some employers, fearful of the risks accompanying fiduciary status, are listening.  They recognize that they don’t necessarily understand their obligations and responsibilities and the prospect of insulating themselves from risks involved in administering a retirement plan is appealing.  And in many cases, a course of action that results in the plan fiduciary hiring an expert is in the best interest of both the fiduciary and plan.  This said caution and understanding on the part of the plan fiduciary is still needed.

The most aggressive of these fiduciary service marketers propose to transfer all employer fiduciary risk to themselves by the delegation of certain functions that may include plan administration, investment management or a combination thereof.  With all fiduciary obligation for those functions lifted from the employer’s shoulders, they claim, the employer can focus on making their enterprise successful, rather than on the sometimes-indecipherable details of employee benefit administration. 

The marketing pitch is likely to contain official-sounding references to one of several classes of fiduciary, and tout the level of protection – even immunity – that the fiduciary service provider can give the employer.  But, whether the marketer presents itself as a 3(16) fiduciary, a 3(21) fiduciary, a 3(38) fiduciary, or what-have-you, there is one inescapable fact that often times you will not see prominently advertised.  While a service provider can take on fiduciary liability by the tasks it performs, the employer is always ultimately responsible for fiduciary decisions.  That’s because it is under the employer’s ultimate fiduciary authority that entities such as investment managers, third-party administrators, or those who only perform ministerial functions, and all who serve the plan, are chosen.   The employer is ultimately responsible for the providers they appoint to fulfill these roles and has an ongoing obligation to monitor the actions of each provider.  While use of experts to fulfill these roles is often a prudent course of action for the plan fiduciary, they must always remember that their fiduciary obligation doesn’t end with this appointment. 

When you dig deeper into the fine print of some of these fiduciary promotions you will typically find disclaimers.  These disclaimers, when interpreted with only a modicum of legal expertise, make it all too clear where the buck stops. It stops with the employer.  It is imperative that an employer understand exactly what is being provided and any limitations when choosing to use these types of fiduciary services.  All else being equal, an employer will be in better hands working with an administrator or service provider that acknowledges an employer’s fiduciary risk – and will help limit it through good services and administration and in some cases may even assume some of that risk – rather than someone who proposes to eliminate it all and doesn’t provide the entire fiduciary story.

Recordkeeper Consolidation Would Not Mean Falling Skies

A recent article appearing in the retirement industry press made a bold, but not necessarily accurate, statement about the consolidation of qualified plan recordkeepers and the services they provide.  First, the assertion that “rising technology costs, lower fees and increased intellectual capital needed to remain competitive” will lead to consolidation, and will reduce the total number of retirement plan recordkeeping service providers.  That much may very well prove to be true.  The bold statement came next, claiming that this consolidation “will result in higher fees and worse service.”

Beyond the obvious question of how the competitive need for lower fees and increased services will eventually result in higher fees for less services – those two contrary claims were made in consecutive sentences – there are other reasons to question the article’s pessimistic prediction.  Technology, and the costs associated with it, have certainly come to recordkeeping.  Investing retirement plan assets has become extremely sophisticated in a mostly daily-valuation environment, and the overall volume of transactions and plan-to-participant interactions has grown exponentially.  The idea that these things can be done efficiently and cost-effectively by manual means, or with simplistic technologies, is no more valid than believing that the evening news should be shot on film, rather than digitally.   Better technology has its price.

But in many, many cases where advancing technology has been applied, we can point to greater capability and lower prices, not less service and greater expense.  Smart phones, computers, robotic manufacturing, even the early assembly line process dating back to the time of Henry Ford, are examples of the quality and cost benefits of applying new technologies to a product or service. 

Another implication of the article is that the only way providing recordkeeping services can be profitable is if the provider has another product to sell, such as – for example – proprietary investments.  Believe it or not, there are recordkeepers in the marketplace who run profitable businesses without cross-selling anything, just as there are fee-for-service investment advisors who make a living without being compensated in other ways.  Neither model is wrong.  But I believe it’s inaccurate to state or imply that only by selling another product or service can recordkeepers serve the industry well, or remain in business.

From my observations, consolidation within the recordkeeping industry should not be seen as a sky-is-falling development.  Conscientious recordkeepers will continue their commitment to offering the best product they can, at a price that generates a reasonable profit, but is also fair to plans and their participants.  If they do less, someone will see the obvious opportunity and take their business. This dynamic will continue to govern the recordkeeping industry, as it has, whether the quality recordkeeper has many industry peers, or few.

EBSA May Be Listening After All … We Hope

Many seasoned industry professionals will remember an iconic TV commercial of some three decades ago, produced for the E.F. Hutton brokerage firm.  In this ad, when the broker shared his insights, the world around him came to a frozen-in-time standstill, in order to hear what he had to say.  The theme was: “When E.F. Hutton talks, people listen!” 

I don’t want to suggest that when representatives of the Department of Labor speak, the world comes to a complete halt and gives them undivided attention.  But when the subject is one which is as controversial as proposed regulations on a definition of “fiduciary” for retirement arrangements, the effect is similar.  Assistant Secretary of Labor Phyllis Borzi, of DOL’s Employee Benefits Security Administration (EBSA), had a captive audience when she spoke on this subject at the International Foundation of Employee Benefit Plans’ Washington Legislative Update in early May. 

In her comments, Ms. Borzi seemed to show a mixture of accommodation with a hint of impatience.  She acknowledged that her agency has slowed the pace of completing new proposed regulations to define “who” and “under what circumstances” an advisor or investment representative should be considered a fiduciary with respect to retirement assets.  Promised August issuance of these proposed regulations appears now to have been reset, in order to – we are told – obtain more input from the industry and interested parties.  In fact subsequent to this May presentation, the agency’s updated Semiannual Agenda of Regulations now lists a target date of January 1, 2015.  At the same time, however, Ms. Borzi was quoted as saying that “We’re not going to wait forever.”  It is apparent this is a high priority for Ms. Borzi and one she intends to see come to pass as quickly as possible. 

It is not entirely clear whose hand is actually on the throttle with respect to these new regulations.  Ms. Borzi has been EBSA’s “point man,” champion, and spokesperson for them since an earlier version was released in 2010, then withdrawn in 2011.  Yet she indicated in her recent comments that new DOL Secretary Thomas Perez would give the order on when to issue the new proposed regulations.  Adding more uncertainty is the fact that this is a mid-term election year, when control of the Senate and House of Representatives – really the national balance of political power – is up for grabs.  In a foretaste of the political season to come, already we see legislation being introduced in Congress that appears to be primarily intended to expose the opposing party to negative publicity, and provide campaign advertising fodder in the fall campaigns.  If the party now in the White House comes to view the proposed fiduciary definition regulations as a potential political liability, we can be almost certain that they will languish until after the November elections.  The  release of the regulatory agenda seems to indicate that is exactly what has happened.

Many in the industry fear that if EBSA overreaches in its new proposed regulations, advisors who are concerned about a level of responsibility out of proportion to their roles – and potential litigation – will be unwilling to advise and consult.  It is feared that if this happens, retirement savers – particularly IRA savers – may find themselves underserved or abandoned when it comes to badly needed investment guidance.  We do not doubt Ms. Borzi’s sincerity or good intentions.  Many simply disagree on the point where agency oversight and regulatory action and investor hand-holding could tip the balance from helpful to harmful, and leave retirement savers the losers in the bargain.  Taking the time to balance all the facts and to get this right seems to be the prudent course of action. 

Thoughts on “Decoration Day”

Given the pace at which we live our life these days, it’s pretty easy to let the distinctions between the different holidays become blurred.  We often find ourselves seeing holidays as just a break from time in the office, an extra-long weekend to spend on our favorite pastimes, an opportunity to focus on things other than work, or – less exciting, perhaps – to make progress on projects. 

If there is one holiday that we should not let that happen to, it is Memorial Day.  It’s a day to remember the sacrifices that others have made for us.  Ultimate sacrifices, to put a finer point on it.  As is often said of those who have served, “all gave some, some gave all”.  In honor of those who have paid that price, this blog will depart from its normal retirement plan focus and look at what this holiday means. 

There are probably few who are younger than the baby boom generation that will recognize the term “decoration day,” and even those of this generation that do recognize it, likely does so only because their parents or grandparents may have called it by that now-archaic name.  Memorial Day was, in fact, first known as Decoration Day when it was recognized as a national holiday following the American Civil War.  It was a day, traditionally the last Monday in May, when family members and others put flowers on the graves of soldiers, both Union and Confederate, who died in what many consider the event that most defined us as a people and a nation.  In other words, they "decorated" the graves in memory and recognition.  Since those early days the title changed and Memorial Day has officially become a day to honor and remember all who have made that ultimate sacrifice while in military service. 

Many Americans have no idea or have forgotten how close our country came to being two countries, rather than one, a century and a half ago.  There is no way to properly envision or comprehend what two divided Americas might not have accomplished in shaping the world as it now exists.  In particular, helping as we did to save our world from dark forces that rejected individual freedoms and sought political and military domination.  We are by no means a perfect nation.  We have made our mistakes and have our flaws.   But in our balance of imperfection and good intentions, our commitment to self-determination and individual liberties stands out and we can be proud of most of what we have come to stand for to the rest of the world.

The sacrifices a century and a half ago that affirmed us as a united people have been demonstrated more than once, in world wars and in other conflicts, but also in peaceful things, made possible by the common purpose that was a byproduct of our unity.  Creating an international forum in which nations can attempt to resolve their differences, striving and working for equal opportunity and personal dignity for our citizens, exploring the universe beyond the confines of our own sphere, and many other accomplishments, are a legacy of sacrifices both before and since the first Decoration Day. 

As a nation and a people we are not inclined to dwell on gloom and loss, the emotions that must have accompanied the first Decoration Day.   We’re inclined to look toward the future through the lenses of optimism and confidence.  Maybe that is why Memorial Day as we celebrate it in our era is a time for smiles and laughter, appreciating our families and friends, as well as for remembering the sacrifice and loss of those who have served and insured our freedom.

And after this welcome holiday is over, a time to get back to working toward a worthy and secure retirement for us all.

More Musings on the New Rollover Limitation

One of the truisms of our industry, as it is a truism of life, is that “nothing is as constant as change.”  That certainly applies to the IRA rollover limitation issue, which reared its head in the Bobrow v. Commissioner U.S. Tax Court case, and completely upended thirty-plus years of IRS interpretation on IRA rollovers.   As most will remember, the Court disallowed a taxpayer’s IRA rollover on the grounds that he was limited to one rollover distribution per taxpayer per 12-month period, not one rollover per IRA per 12-month period.  Proposed regulations dating back to 1981, and IRS publications, had formerly granted the more liberal option.

That’s water under the bridge, because the IRS has fallen into marching step with the new drummer – the U.S. Tax Court.  The IRS revealed in Announcement 2014-15 that, going forward, the rule will be one IRA distribution per taxpayer, not per IRA, that will be eligible for an indirect 60-day rollover in any 12 month period.   Released in March, Ann. 2014-15 stated that the IRS would not enforce this new interpretation before January 1, 2015.  Ascensus has since learned from a reliable IRS contact that the “no sooner than” timing for enforcement of this new interpretation will, in fact, be January 1, 2015.  The IRS representative stated that the nine month enforcement reprieve – from March to next January – was granted in response to industry requests for a grace period to allow IRA custodians, trustees and issuers to adjust their procedures.

Some over-eager service providers did not wait until the IRS released Ann. 2014-15, but responded to the January Tax Court decision and immediately informed clients and prospects that they should amend their IRA documents, advising that they do this at the first opportunity.  They also indicated that the new interpretation had to be followed and adhered to immediately.  This was suggested not only before the IRS responded to the Tax Court ruling by issuing Ann. 2014-15, but before it was even known whether the Bobrow case would be appealed, and whether its ruling might be upheld, or reversed. 

The point here is that it is usually best in such situations to let the dust settle, to not over-react, or – as some might do – take an opportunistic tack and recommend actions prematurely.  Yes, IRA documents will certainly have to be revised for new accounts, and it is advisable that existing IRAs be updated to align with the new interpretation that will govern future rollovers.  But, as revealed in Ann. 2014-15, we are still nearly seven months away from the earliest enforcement date for the new rule, and no date has been even hinted at for updating existing IRAs.  For the remainder of 2014, the enforcement of the rule will remain as it has been, one rollover per IRA. 

A little reflection on the new rollover interpretation might also be in order here, given the level of uproar and resistance seen within the industry.  Many were predictably upset that the Tax Court ruled as it did, reversing a long-held tradition and contradicting an oft-stated and oft-published IRS position.   Perhaps more upsetting was the fact the IRS brought this case in the first place and didn't give credence to their own published guidance.  Regardless of this, the statutory reference to rollovers in the Internal Revenue Code has not changed since 1978, and a plain-language reading of it – while somewhat ambiguous – can in all honesty be read as the Tax Court did, limiting rollovers to one per-taxpayer per year.   

The Tax Court took the position that our lawmakers intended to make access to IRA funds possible, but not so easy as to encourage abuses.  “Leakage,” or frittering away retirement assets, has long been a concern of Congress.  Also, there are clear prohibited transaction rules that discourage an IRA owner from dealing “…with the income or assets of a plan in his own interest or for his own account.”  IRA assets are to be preserved for retirement as much as possible.  Some might say that the strategy – permissible under the existing rules – of setting up multiple IRAs and thereby receiving multiple rollable distributions within the same 12-month period, was tantamount to enabling the taking of multiple 60-day “loans” from one’s IRAs.  Put another way, that person could, in some peoples minds,  be accused of using IRA assets “in his own interest.” 

As much as we like flexibility and freedom when it comes to our own property, we can’t ignore the desirability of accumulating sufficient assets to experience a reasonably comfortable, independent retirement.  We also can’t ignore the fact that we typically receive a tax break as an encouragement for us to save.  Sometimes we rely on our own discipline to resist temptation and make the right choices, and sometimes the Tax Code does it on our behalf.  If it serves the ultimate end of helping us accumulate assets for a secure retirement, maybe the change in the rollover limitation won’t be such a bad thing after all.

IRS Inbound Rollover Guidance May Both Help and Hinder

Retirement plan rollovers are a high priority for the IRS these days.  That is not a criticism, because the portability of retirement savings is essential to workers if they are to have the maximum opportunity to retain IRA and employer plan assets for a financially secure retirement. 

Perhaps the rollover issue getting the most attention has been the IRS’s declaration in Announcement 2014-15 that it will change its stance and limit taxpayers to one IRA rollover per 12 months, regardless of how many IRAs an individual has.  Some have suggested that the agency itself “rolled over” by abandoning a position it held for over 40 years, which had allowed one rollover per IRA per 12 months.   But it is pretty hard for the IRS to ignore a U.S. Tax Court decision (Bobrow v. Commissioner), which prompted the reversal.

More recently, the IRS issued guidance intended to give employers some comfort and certainty when their plans accept employee rollovers from IRAs or other retirement plans.  This guidance, Revenue Ruling 2014-9, provides several practices which, if followed, may serve as evidence that the administrator of the recipient retirement plan took the necessary steps to determine whether assets being received into the plan were eligible for rollover.

Under Treasury Regulations, a plan administrator will jeopardize the qualified status of a plan with respect to  a rollover unless two conditions are met.  The administrator must “reasonably conclude that the rollover contribution is valid,” and if it later proves otherwise, “distribute the ineligible rollover contribution, with earnings, within a reasonable time of discovering the error.”

In the past, some plan administrators felt it necessary to go to such lengths as requiring an employee to produce a determination letter from the prior retirement plan where the pending rollover originated.  In those days, prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), only assets that originated in another qualified retirement plan could be rolled over to a new one.  What’s more, when distributed from such prior plan and not immediately rolled over to a new plan, the assets had to reside for the interim period in what was then known as a “conduit IRA.”  It was a lock-box, or quarantine, you might say.  Commingling such assets with other IRA or employer plan assets disqualified them for rollover to another employer plan.

Motivated by concern over workers dissipating their retirement assets prematurely, Congress, through EGTRRA, liberalized the rollover rules to enhance plan-to-plan portability and hopefully limit such “leakage.”  Thereafter, general portability between plan types, and even rollovers to employer plans of IRA-originating assets, was possible. 

The expectations of employers changed, too.  It may be over-simplifying, but instead of absolute certainty that assets received in a rollover had come from a compliant qualified plan or IRA, employers were required to take steps to be “reasonably certain” that a rollover was valid. Under this standard, employers have had a certain amount of flexibility in making such determinations. 

The IRS has now, in endeavoring to add clarity for employers, provided a list of actions an employer can, or should, take in determining whether a rollover is valid.  Steps described in IRS Revenue Ruling 2014-9 include visiting the Department of Labor’s web site and reviewing a prior employer plan’s Form 5500 filing, to see whether it was “intended to be a qualified plan,” in the IRS’s words.  “Certification” of rollover validity is to be obtained from the employee requesting the rollover, whether it’s from another employer plan, or from an IRA.  Reliance on documentation from a custodian or trustee holding the funds prior to rollover is suggested, with check or wire transfer payment source details given as an example. 

Industry reaction has been mixed.  On the one hand there is appreciation; there is value in details versus generalities.  On the other hand there is some concern and uncertainty over the application of the IRS’s suggested due diligence steps.  In the IRS’s own words the agency states that “These procedures are generally sufficient.”  Are they not always sufficient?  Are they a new minimum standard?  How much latitude and judgment do plan administrators now have in determining rollover eligibility?  The unintended consequence may be more uncertainty, rather than less.   

In the eyes of many, there has not been a significant problem in judging the eligibility of rollovers to employer plans.  What has really been lacking is more aggressive participant education efforts to reinforce the importance of retaining assets for retirement, and the options for doing so.  That, many believe, is where the problems really lie.

Tussey vs ABB Offers Both Clarity and Caution

In March of this year the 8^th U.S. Circuit Court of Appeals in St. Louis handed down rulings in the case known as Tussey vs. ABB.  It was a case closely watched not just for its fiduciary implications for plan sponsors, but also for plan service providers.  In this case the service provider happened to be Fidelity Investments, which served as the investment provider and recordkeeper to the ABB plan.

ABB, Ltd., is a supplier of transmission and distribution equipment for the power industry.  This case centered on 401(k) plan fiduciary responsibility, alleged to have been abused by ABB and Fidelity Investments.  Specific allegations included ABB’s supposed failing to properly monitor recordkeeping fees, and selecting unnecessarily costly share class investments.  Recordkeeper Fidelity was alleged to have improperly retained float income associated with the funds used to purchase securities shares as plan investments.  The law firm representing the plaintiffs, Schlichter, Bogard & Denton, has been at the forefront of litigation against plan sponsors for alleged fiduciary failures. 

In the boxing world this one might be called a split decision.  The appeals court upheld a lower court decision that ABB, Ltd., was guilty of “failing to control recordkeeping costs,” and the court affirmed a $13.4 million award to plan participants.  ABB was judged to have failed in the area of due diligence, specifically by not “comparison shopping” or benchmarking the fees it paid Fidelity for recordkeeping.

The appeals court vacated, or set aside, the lower court’s judgment against ABB for its mapping of an investment option between fund families, and subsequent losses to participants who held that mapped investment.  This one will go back to the lower court for further litigation.

One element of the appeals court’s ruling is of particular interest to many retirement plan service providers.  That was its overturning the district court’s finding that Fidelity had improperly used plan assets by not allocating “float” income among the plan’s participants.  “Float” can be described as a sum used to purchase investment shares, held temporarily – for logistical reasons – until it can be paid to the chosen investment funds to purchase the shares requested.  This timeframe is commonly next-day.    

In a strategy that many would call prudent, Fidelity invested this float in secure investment vehicles that could earn interest during the very brief overnight float period.  Earnings, or “float interest,” was distributed broadly among all shareholders of the selected mutual funds, whether these shareholders were plan participants or simply private investors.  Fidelity did not retain the float interest for itself. 

The plaintiff’s attorney claimed that this float interest belonged to the plan, not broadly to all investors in these mutual funds.  The float interest was, plaintiff’s counsel claimed, a plan asset that Fidelity improperly distributed to investors other than plan participants.  Fidelity countered that the participants had been immediately credited with the shares they directed to be purchased, and were entitled to – and paid – any dividends or other gains associated with the shares purchased for them.  The “cash” used to purchase the shares, however, was no longer the property of the plan once the share purchase transaction was executed, Fidelity asserted.  The appeals court found that the plaintiffs were unsuccessful in rebutting Fidelity’s position on entitlement to float interest, and reversed the district court’s $1.7 million judgment against the firm. 

There may be multiple morals to this story, for plan sponsors, administrators and service providers alike.  Especially worth emphasizing is the importance of transparency and due diligence.  Knowing what is being paid for and what is being received, and knowing that amounts paid are “in the ballpark,” is crucial.  We get a sense from this and similar ERISA litigation that “reasonable” is a relatively flexible term in the eyes of the courts, as long as the terms of service and compensation are disclosed.    

EBSA’s New Disclosure Guidance: Questions as Much as Answers

On March 12th, the Department of Labor’s Employee Benefits Security Administration (EBSA) proposed new guidance intended to make it easier for retirement plan fiduciaries to understand information about the services provided to their plans, and the fees paid for them.  Whether or not EBSA’s proposal will become a mandate remains to be seen.  But what IS clear is that the retirement plan community is sitting up and taking notice, and beginning to assess just how challenging it might be to comply if this proposal becomes a requirement.

This latest proposed guidance would amend the previously issued EBSA final fee disclosure regulations, the purpose of which is to assist fiduciaries in prudently selecting and monitoring service providers to their ERISA-governed plans, and to ensure that service arrangements are reasonable.  To accomplish this, detailed information on services and accompanying costs must be disclosed by a covered service provider, or CSP.  A CSP is any entity that expects to receive at least $1,000 in direct or indirect compensation for services – such as advisory, fiduciary, recordkeeping, etc. – to a plan.

The final regulations permit service providers to use multiple documents, such as a collection of contracts, client agreements, memoranda, etc., to disclose services and fees.  The final regulations did not define how such documents were to be organized, or specify that there must be a table of contents, or other guide, to help fiduciaries find the service and fee information.  There was, however, a “sample” guide that service providers could elect to use to help fiduciaries find the required information.  Perhaps that should have been our clue.

Now enter EBSA’s new proposed amendment to these final regulations.  If a single, relatively simple document provides all of the needed service and fee information, all would be well, and no additional documentation would be needed.  But, if a CSP provided service and expense information in a lengthy document, or in multiple documents, this new EBSA amendment would require furnishing a separate guide to help the fiduciary find the required information.

When would this separate guide be needed, and how detailed must it be? It is on these questions that the difficulty of complying will turn.  If multiple documents are used to satisfy the CSP’s fee disclosures, the guide proposed in this amendment would require identifying each document, and within it, each required item of information.  Section or page numbers would be required to narrow down the location of disclosure information within the document or documents. 

As one might imagine, this prescription has generated questions.  Such as, what is “quick?”  What is “easy?”  What is “lengthy?”  And a big one: “who will decide?”  There is legitimate concern that if a guide must have specificity down to the page number, or to the paragraph, it could be extremely costly for a CSP to create custom guides for the many plans it may serve.

Part of our due diligence is to objectively assess the impacts this guidance could have; not just on our compliance practices, our service agreements, or our own bottom line, but also on the costs that will have to be – and many would say should legitimately be – passed on to plans and their participants. 

It must be remembered that this guidance is a proposed amendment, but at the same time it does reflect EBSA thinking.  It is likely to be modified, or reasonably implemented, only if our legitimate objections – should we have them – are vigorously presented and argued.

Will EBSA’s desired ends justify the means?  How simple must we make it for fiduciaries to assess their service provider relationships?  As we judge the pluses and minuses of this proposed amendment, what is the proper balance between perfection and its price tag?  Good questions; so far without answers.