Regulatory Year in Review

regulatory

By Peter Kennedy, Special ERISA Advisor, Vestwell

2018 continues to be a year of change – – on the regulatory and legislative fronts. From the now-abandoned DOL fiduciary rule to several other bills making their way through Congress, plan sponsors and advisors should understand how these legislative updates affect them and their qualified retirement plans.

The DOL Fiduciary Rule

Among all of the changes in the retirement industry this year, perhaps the most significant was the DOL’s Fiduciary Advice Rule (A.K.A., “the Rule”).  After much debate, the Fifth Circuit Court of Appeals vacated the Rule in its entirety. And, at least for the time being, advisors are once again subject to the pre-existing rules as to what constitutes “investment advice” under ERISA.

What exactly are these pre-existing rules and what do they mean for advisors and their retirement business? We’re glad you asked. Many advisors under the old 5-part test for investment advice regularly helped clients with 401(k) plan design, investment menus, plan education, and other matters – all without the assumption that they were fiduciaries to the plan. The Rule was meant to alter that assumption by characterizing most types of advice to retirement plans and IRAs as “fiduciary advice.” That meant an advisor would have been subject to significant fiduciary liability, but since the Rule has been vacated, advisors are once again free to offer plan advice with less concern for legal ramifications.

Although not directly related to retirement plan assets like the Rule, the SEC recently proposed the Regulation Best Interest (a.k.a. “RBI”) which would impose a higher standard of conduct for broker/dealers and their associated persons who give securities advice to “retail customers.” RBI is not a replacement of the Rule and is generally considered less stringent. With the DOL’s recently announced plan to re-propose its Fiduciary Advice Rule in 2019, there is more coming from the regulators that will likely affect how to advise retirement plans, their participants, and investors.

Other Legislative Matters

Several other bills could change various rules under the Internal Revenue Code and ERISA. Below are some highlights:

Retirement Enhancement and Security Act (“RESA”)

Probably the most far-reaching – and recipient of the most media attention – RESA would make it easier for small employers to participate in Multiple Employer Plans (MEPs). Other features of the bill would affect rules pertaining to auto-enrollment, nonelective contributions, plan loans, certain nondiscrimination rules, and process for selecting lifetime income providers, all of which are intended to encourage small businesses to offer retirement plans to their employees.

Retirement Lost and Found Act

This act also minimizes the administrative burdens on plan sponsors by easing the requirements on them to locate former employees with small, unclaimed distributions. Locating these so-called “missing participants” can be a tedious and costly process for small businesses and the Act would require the government to create an online resource to find these individuals.

In addition to the legislative matters above, other bills have been proposed that cover a variety of topics including increasing the amount that could be distributed to a former participant without consent, simplifying the complex rules related to offering annuities in qualified retirement plans, and changing the default option for delivering plan information to electronic delivery. Stay tuned in 2019 as we continue to monitor new rules that will impact advisors and their firms…and navigate them together.

A “Reasonable” Approach to Who Pays Plan Fees

plan fees

Written by Allison Brecher, Vestwell’s General Counsel

The recent barrage of litigation and emerging regulations about retirement plan fees have put plan sponsors on heightened alert to make sure the fees incurred by the plan are reasonable and that they are paid properly. It’s a difficult assessment to make, complicated by the broad array of administrative expenses, with confusing terms like back-end load fees, revenue sharing, and 12b-1 fees.  It’s hard enough for plan sponsors to understand what fees service providers are charging, much less whether the plan or plan sponsor should pay for them. However, it doesn’t have to be and there are plenty of opportunities for advisors to assist in making things more clear.

Depending on the plan sponsor client’s philosophy, sponsors may want to shift as much of the plan’s costs, like recordkeeping expenses, legal fees, and mutual fund expenses, to the plan and participants. Unfortunately, a plan sponsor can significantly harm the plan, and itself, by doing so without careful analysis.

Where to start?

The plan document may specify whether administrative expenses can be paid by the retirement plan assets. If the document says only the plan sponsor can pay, then the plan must reflect that. Some plans require the plan sponsor to advance the payment and get reimbursed by the plan later, in which case the payment and reimbursement should be made within 60 days in order to avoid a Department of Labor requirement for a loan agreement between the plan and sponsor.  If the plan is silent, then analyze DOL regulations to determine if payment by the plan is permissible. Costs relating to plan formation, termination, and design are typically paid by the plan sponsor whereas recordkeeping and investment consulting expenses can be paid by the plan.

The plan can only pay for reasonable expenses – but what is “reasonable”?

This is the central issue in dozens of lawsuits. Participants rely on their plan sponsor to negotiate the best deal with service providers and it therefore becomes the sponsor’s fiduciary duty to make sure the plan is only paying reasonable fees.

Unfortunately, it can be hard to understand all of the direct and indirect compensation paid to plan providers. Sponsors need advisors’ help to ask the right questions. Some expenses, like sales commissions and back-end load fees on mutual funds, are paid out of the assets’ investment returns and therefore charged indirectly to participants. Those charges may not be apparent on participants’ benefit statements. Worse yet, there is no single benchmark for retirement plans to use as a baseline comparison. For this reason, some sponsors prefer to pay for expenses themselves since only plan assets, not corporate assets, are within a regulator’s purview.

Advisors can help sponsors by reviewing the expenses paid by similar plans. All ERISA plans file Form 5500s annually, which are public and should disclose all fees paid by the plan. Making an apples-to-apples comparison can be difficult because some sponsors do not know, and therefore cannot disclose, all indirect compensation. Advisors can also help clients prepare requests for proposals to understand available pricing options, such as flat fees or per participant fees that are more transparent and easier to understand. They can also help evaluate the quality of services, since the DOL acknowledges that cost alone should not be the only determinative factor.

Monitor, monitor, monitor

Sponsors should periodically reevaluate the plan’s fees. Even though a sponsor hires consultants to assist, they remain a fiduciary and must regularly evaluate the changing marketplace. As always, documenting their decision making process is critical. Sponsors must also remember to check whether services are being provided by a party-in-interest and satisfy the prohibited transactions rules.