Compliance April 25, 2017

Sorting Out The Fiduciary Rule ‘Curveball’

The Trump Administration’s Department of Labor still has not amended or replaced the Obama-era fiduciary rule as it has pledged to do; it has simply issued a brief delay and some supplemental interim exemptions. 
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The 20th “Inside the Beltway” regulatory update session hosted by Drinker Biddle and Reath in partnership with Natixis Global Asset Management brought together more than 1,000 retirement industry professionals, all of them wondering exactly what is in store for the future of the Department of Labor (DOL) fiduciary rule.

Fred Reish, chair of the Drinker Biddle and Reath financial services ERISA team and chair of the retirement income team, called the attendance “remarkable.”

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“It shows just how unclear a lot of this stuff still is,” he noted, “and just how much of a demand for insight there is.”

As Reish and colleague Brad Campbell, partner in the firm’s Employee Benefits and Executive Compensation Practice Group and former Assistant Secretary of Labor, explained, the fiduciary rule is now slated to take effect June 9.

“On that day we will see the fiduciary rule become applicable,” Campbell warns. “Not one comma has changed within the rule itself, and so everything we have warned about in the years of debate leading up to this point, all the examples of circumstances that would amount to a broker triggering fiduciary advice and fiduciary breaches for the first time, becomes applicable on June 9.”

Campbell warned that, while the DOL has signaled it could do another implementation delay prior to June 9, the more likely course is that the fiduciary rule will in fact be implemented. Important to note is that, while the fiduciary rule itself has not been changed, the DOL under Trump’s leadership has issued several new transition exemptions—most notably a new “best-interest contract transition exemption” and a new “transition 84-24 exemption.”

According to Reish and Campbell, together, these new transition exemptions will do a lot in terms of easing some of the compliance burden associated with meeting the fiduciary rule requirements. The new transition 84-24 exemption in particular is expected to help independent insurance agents continue to serve the retirement plan market through commission-based business models, for example, although real challenges remain.

The transition period will run into 2018, Campbell and Reish noted.

“It will be in that transition time period that the Labor Department determines ultimately whether to make changes going forward, and right now it seems like it could still go either way,” Reish said. “June 9 is a very important deadline in that respect, because the DOL has said they are unlikely to issue any more delays. It’s also possible that Congress could theoretically impose another delay before that date, but I wouldn’t hold my breath on that either.”

Regarding how the actual process will unfold around all this, Campbell suggested the new Labor Secretary nominee Alexander Acosta will likely be confirmed this week, “most likely Wednesday or Thursday.” He called this a positive development that should help bring some additional clarity. 

Data & Research April 25, 2017

Most IRA Assets Flow From Employer Plans

A new study by the Center for Retirement Research explores the modern state of the individual retirement account and those who invest in it.
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Even though individual retirement accounts (IRAs) were designed to be tax-preferred alternatives to employer-sponsored retirement plans, most assets in these vehicles are rolling over from 401(k)s, according to a study by the Center for Retirement Research (CRR).

Today, IRAs still dominate private retirement assets. By the end of the third quarter of 2016, $7.8 trillion dollars were invested in these vehicles. The figure far exceeds those invested in defined contribution (DC) and defined benefit (DB) plans, which account for $5.7 trillion and $3.3 trillion respectively.

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The study also surveyed some of the characteristics of the typical IRA account holder. CRR notes that most tend to be white, college educated, and already contributing to a 401(k). The organization concludes that “IRAs – as currently used – have drifted very far from their original intent of providing tax-preferred retirement saving for those without an employer plan. These vehicles currently do little to encourage retirement saving, but rather serve as the landing place for assets originally accumulated in 401(k) plans.”

The main reasons, CRR surmises, are that employees rarely want to leave money with their old employers and moving over assets into a second employer-sponsored retirement plan is often difficult and time consuming. However, several industry leaders are actively pushing to make auto-portability the standard.

Nonetheless, IRAs continue to be a driving force. Although most assets in these plans are flowing from previous employer plans, individuals’ contributions account for about 13% of new IRA assets each year.

According to the Investment Company Institute (ICI), 43 million households or 43% of the total owned IRA accounts. But the industry may soon need to shift notions of these vehicles back to basics. Rather than being the easiest alternative to moving assets to another employer’s plan, these can serve as the default option for those not saving through an employer-sponsored retirement plan. The CRR notes that congressional action could be taken in order to automatically enroll those not saving through an employer into an IRA, with the choice to opt-out. However, political uncertainty especially as it relates to tax reform still persists. But, the CRR notes that even though the course for retirement savings reform seems to be lagging at the federal level, states are moving on to create a framework whereby citizens can be auto-enrolled into a state-run retirement plan if they lack access through an employer.

Access to the full brief “Who Contributes to Individual Retirement Accounts?” can be found at crr.bc.edu.

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