Compliance December 19, 2024

Compliance Year in Review

David Kaleda, an ERISA expert, reflects on the year that was for plan fiduciaries.

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As 2024 winds down, it is a good time to reflect on what happened this year in retirement compliance and what could be forthcoming in 2025.

To start, the Department of Labor, the plaintiff class action lawyers and the IRS have been busy, to say the least. Meanwhile, the election of Donald Trump and a Republican majority in both houses of Congress will certainly make 2025 eventful.

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The Courts

David Kaleda

In 2024, federal courts again stymied the DOL’s attempt to redefine “investment advice” when providing investment recommendations to plans covered by the Employee Retirement Income Security Act, to plan participants, to IRA beneficiaries and to others.

The DOL promulgated its final Retirement Security Rule in April with the intent of making more financial services providers fiduciaries for purposes of ERISA and the prohibited transaction provisions of Section 4975 of the Internal Revenue Code. However, in July, two U.S. district courts—those for the Northern District of Texas and the Eastern District of Texas—indefinitely delayed the rule’s effective date, which was to begin in September.

The courts’ opinions signal the DOL is not likely to convince them it has the authority to define “investment advice” as set forth in the rule. Additionally, it seems unlikely that the DOL under Trump will fight for the survival of the rule.

Plaintiffs’ Bar

The plaintiffs’ class action bar continues to unearth ERISA breach of fiduciary duty and prohibited transaction claims to bring against ERISA plan fiduciaries.

This year saw several federal district courts address whether a plan sponsor or other plan fiduciary violates ERISA when they exercise discretion to use plan forfeitures to pay plan expenses, rather than allocating such amounts to plan participants. While some courts dismissed these claims on the basis that the plan participants failed to state a valid legal claim under ERISA, others denied such motions.

These latter cases will continue to move through the courts and have led some fiduciaries to change their plan language and procedures related to forfeitures and, possibly, other amounts (for example, revenue credits).

Chevron Overturned

As I detailed in PLANADVISER earlier this year, the Supreme Court issued its decision in Loper Bright Enterprises v. Raimondo, which could have a substantial impact on the DOL and other regulators.

In Loper Bright, the court overruled its position from the 1984 case Chevron v. Natural Resources Defense Council Inc., in which it held that deference should be given to a regulator’s interpretation of a statute when the statutory language is vague and Congress’ legislative intent is not clear. The Loper Bright decision could lead to more judicial scrutiny of the DOL’s regulations, like the stayed Retirement Security Rule and its regulation addressing environmental, social and governance considerations in investing and shareholder engagement. Other regulators engaged in benefits, such as the Department of the Treasury, may also be impacted.

Treasury and IRS Activity

Treasury and the IRS had a busy year issuing final regulations, proposed regulations and guidance related to the implementation of changes to the tax code and ERISA caused by the Setting Every Community Up for Retirement Enhancement Act of 2019 and the SECURE 2.0 Act of 2022.

Some of those provisions will allow participants to have increased access to their savings and otherwise help them use their retirement plan to meet their financial and other wellness needs, not just save for retirement. Such provisions include, for example, the use of in-plan emergency savings accounts.

In other cases, Congress indicated that plans should require or encourage participation by lower-paid and younger workers in 401(k) and similar plans. For example, the Internal Revenue Code now requires that more long-term, part-time employees be allowed to make employee contributions to a workplace defined contribution plan sooner and now allows employees to receive employer matching contributions connected to student loan payments. The IRS issued guidance related to these provisions.

The IRS in May also issued Private Letter Ruling 202434006, which allows the applicant’s employees to elect whether employer contributions should be paid (i) to a defined contribution retirement plan, (ii) to a health savings account, (iii) towards student loan payments or (iv) to a retiree health reimbursement arrangement. This indicates that other firms may consider the same approach. 

New Leadership

In short, 2024 was an interesting year. Given the results of the presidential and Congressional elections, we should expect 2025 to have even more twists and turns. Undoubtedly, we will see the DOL once again revisit its ESG regulation. Additionally, we should expect at least a softening of the DOL’s stance on allowing investments in digital assets through a participant’s retirement plan brokerage window.

Given the Republican majority—albeit a slim one—in Congress, we should expect members of Congress to introduce legislation intended to support Trump’s agenda with regard to these and other issues.

Trump appears to be ready to hit the ground running. It should be a busy year for advisers.

David C. Kaleda, principal, Groom Law Group, Chartered.

Practice Management December 18, 2024

RIA Succession Planning Drops to New Low

DeVoe’s annual team management survey paints a dire picture of succession planning for aging advisories.

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The succession concerns for registered investment advisers didn’t just continue in 2024, but hit a new low, according to consultancy DeVoe & Co.’s annual team management report.

In a national survey of more than 100 senior RIA executives, principals and owners, DeVoe found that 42% of firms have written succession plans, the lowest since it began tracking the statistic in 2019.

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“It is not only concerning that the number of written plans has been decreasing, but also alarming that the level of planning has hit a new low,” DeVoe’s team, led by Founder and CEO David DeVoe, wrote in the report. “Ironically, an industry with ‘planning’ and ‘risk mitigation’ as core components of its value proposition is failing in these very regards.”

The Financial Regulatory Authority has been ringing the alarm on the need for succession planning among aging financial advisers for years. But DeVoe’s team believes that many firms, seeing rising valuations, assume that the next generation will not be able to buy out founders and often are not bothering to create plans.

The consultants believe this is short-sighted thinking, writing that having a “succession plan is not just about the economics, it is also about management transition. The very presence of a succession plan will not only create a stronger future for the firm but will also increase the value of the RIA to most sophisticated buyers.”

DeVoe also pointed to rampant RIA merger and acquisition activity as a possible factor in the decline. Larger RIAs with more than $1 billion in assets are twice as likely to have a succession plan, but they are also more likely to sell to an external buyer.

“Essentially, as firms with succession plans sell externally, the remaining total of firms with plans drops,” the consultancy wrote.

There were bright spots in the findings. For one, firms seem to at least be aware they should have a plan. About 30% of surveyed RIAs reported they intend to create a plan—up from 22% in 2020. Another 20% have plans drafted but have not yet implemented them.

In addition, responses indicating an RIA is “not considering” a succession plan dropped to an all-time low of 8%.

Next Gen Trepidation

According to DeVoe, RIA leaders would prefer to hand the reins to an internal candidate. Unfortunately, many do not trust the next generation to take over, with only one-third saying they believe the next generation is ready to assume control if a transition were to happen immediately.

Another 34% of RIAs have medium confidence that the second-generation candidate would be ready to take over, and 32% have no confidence at all.

The next plan of action, of course, would be to cultivate talent capable of running the firm in the future. In this area, DeVoe found more mixed results.

On the positive side, RIA firms are more likely (46%, up significantly from 24% last year) to have semi-annual performance review processes in place than in the past, something DeVoe recommends to both guide and cultivate talent.

While that growth is good, the consultancy noted that human capital research from the Harvard Business Review suggested that 92% of employees want feedback more than once per year.

The fact that the majority of firms do not offer semi-annual reviews may flow into career pathing issues. Slightly more than half (52%) of RIAs surveyed reported that their employees have a clearly articulated career path. Another 39% say they provide informal direction, and 9% say there is little communication.

Where’s the Money?

Given leadership’s need to have successors, it would stand to reason that firms are looking to incentivize people to stay through compensation strategies. This seems an especially relevant option since growth in assets under management has been strong, with the Investment Adviser Association recently noting a 12.6% year-over-year increase in AUM in 2023 to $128.4 trillion.

The reality, however, does not seem to back up the idea of more pay flowing to advisers, according to DeVoe’s surveying.

In 2024, 49% of respondents said they had a clear, methodical plan for incentive compensation for advisers, a slight decline from 50% in 2023 and down from 57% in 2022. Another 28% this year said they were giving informal direction, 15% said they were giving discretionary bonuses and 8% said they had no plan.

In addition, when asked to rank their firm’s incentive program on a 10-point scale, responses yielded a Net Promoter Score of negative 30, meaning more respondents were dissatisfied with their program than find it worth recommending to a friend, by a considerable margin (30% of respondents).

“The surprisingly low score of negative 30 is a blinking red light that this industry needs to pay attention to,” the consultants wrote. “A takeaway from this barometer is even RIAs with ‘methodical plans’ or that confidently believe their plan is working well with their employees should take the time to assess if the plan is really hitting the mark.”

If RIAs are in the midst of a bumpy patch in getting current employees to lead, the future may be brighter. For one, DeVoe found that attrition has been declining for RIAs over the past three years. That may be in part due to consolidation, but it is ultimately positive for talent cultivation.

Meanwhile, more RIAs are hiring people “ahead of need,” rather than doing so on demand.

“By adopting a thoughtful, strategic approach to recruiting, an RIA firm can build a strong, aligned team that will help drive long-term success,” the consultancy wrote. “This approach can also position a firm as a trusted, competitive leader in the industry.”

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