Compliance January 23, 2017

Delay Seems Likely, But Confusion Remains on DOL Fiduciary Rule Future

Conflicting media reports have started to circulate, some to the effect that a delay of the DOL fiduciary rule has already been effectuated—others that are more skeptical this is even possible. 
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It is more or less standard practice that an incoming U.S. President will move to halt or delay a predecessor’s unfinished regulatory projects—particularly when there is a shift in the party controlling the executive branch.  

What is less clear is how much power a newly minted president has to overturn straggling regulations that already went through the full proposal/comment/finalization process under the previous POTUS—which are simply waiting on staggered implementation deadlines to fully take effect. Further complicating the picture will be the millions, if not billions, of dollars that the affected industry will have spent to meet the hurdles established by the fully finalized regulation.

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This is just the environment overhanging the Department of Labor’s (DOL) longstanding effort to strengthen the fiduciary standard as applied under the Employee Retirement Income Security Act (ERISA). The new fiduciary rule was finalized in June 2016, but it includes implementation deadlines stretching out into 2018, with the first roughly 10 weeks away. 

Since President Donald Trump finished his transition into power in the last week, many industry experts—attorneys, lobbyists and advisers—have opined that the fiduciary rule is most likely doomed. This is despite the fact that the advisory and investment industries have spent significant sums to bring business models, investing tools, sales practices and more into compliance.

The latest move in the more-than-decade-long fiduciary rule saga came Friday, when Politico published a copy of a White House memo issued January 20 by Reince Priebus, assistant to the President and chief of staff. The order has caused some conflicting interpretations among ERISA attorneys and others focused on the subject matter in that it clearly orders federal agencies to halt their work on rules that have not yet been made effective by being published in a finalized version in the Federal Register—at least until a Trump-appointed agency head grants a review and approval. It also seeks, “with respect to regulations that have been published [in final form] … but have not taken effect, as permitted by applicable law, to temporarily postpone their effective date for 60 days from the date of this memorandum.”

The order to executive agency heads continues: “Where appropriate and as permitted by applicable law, you should consider proposing for notice and comment a rule to delay the effective date for regulations beyond that 60-day period. In cases where the effective date has been delayed in order to review questions of fact, law, or policy, you should consider potentially proposing further notice-and-comment rulemaking.”

NEXT: Memo sees various interpretations 

Some have suggested this should be taken to include the DOL fiduciary rule, given the first compliance deadlines do not apply until April 2017. But as explained by David Levine, principal with Groom Law Group, it is important to note that the memorandum uses the term “effective,” not “applicable.”

“To me it is not at all obvious that this new memo would apply to the DOL fiduciary rule,” Levine tells PLANADVISER. “However, as you know, policy in our industry often circulates first as rumor or speculation, so I do agree that a delay in the rule’s implementation remains likely. But I don’t think this memo establishes that.”

Levine suggested it is likely that a direct order from President Trump regarding the fiduciary rule could be forthcoming imminently, and that this is likely what it would take for the fiduciary rulemaking to truly be paused or killed outright at DOL.

“Important to keep in mind is that under the Administrative Procedures Act, you can’t just say the rule is dead because you don't like it,” Levine observes. “The new administration needs a good reason and an effective process to do it. You can’t just get rid of the rulemaking without further rulemaking, in other words. Congress could do it outright, but given that it’s not a revenue item and it's not part of reconciliation, as far as I have heard, you would need 60 votes in the Senate, most likely.”

And so Levine puts a conservative bet on the likelihood that the Trump Administration will move directly, and soon, to re-propose a final rule that would substantially alter or even dismantle the rulemaking.

“The legal angle remains somewhat unclear, but there is also the business reality and the marketing angle of the fiduciary rule implementation,” Levine observes. “People have invested a lot of time and money in preparing for the rule and very few will want to just turn away from that. Some have already sold portions of their business or forged new partnerships to prepare. And so I still believe there will be a wide range of how people move forward. The vast majority will be in the middle, embracing some aspects of the fiduciary rule while resisting others.”

The full White House memo is available here on Politico’s website. 

Client Service January 23, 2017

'Father of 401(k)', DC Expert Suggest Retirement Security Improvements

Ted Benna, whom some call the ‘father of the 401(k),’ and Lori Lucas of Callan, offer suggestions to improve retirement security for Americans.
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In 1980, Ted Benna, one of the founders and owners of The Johnson Companies and an executive vice president there, suggested adding a 401(k) plan to the company’s retirement program.

He tells PLANADVISER he was not trying to start a movement; the only thing he was trying to do is get people focused on saving for retirement. He notes that at the time, the large companies, including The Johnson Companies, had thrift savings plans in place pre-401(k), but those plans were for after-tax contributions. “They were just glorified Christmas clubs. Employees took their money out in December to use for expenditures; they were allowed to take the match out after two years,” he says. “I wanted to get individuals to shift from short-term savings to long-term. With the shift to pre-tax, they had to deal with not taking money any time they wanted to.”

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In a January 2 Wall Street Journal article titled “The Champions of the 401(k) Lament the Revolution They Started,” Benna and Herbert Whitehouse, a former human resources executive at the The Johnson Companies express regret that companies have shifted from defined benefit (DB) plans to only 401(k)s or other defined contribution (DC) plans. Their intent in 1980 was to create a supplemental retirement savings vehicle.

In the article, Benna says, “I helped open the door for Wall Street to make even more money than they were already making. That is one thing I do regret.”

In March 2016, Benna announced a new firm, 401kBena, to provide unbiased retirement plan adviser and total fee benchmarking for retirement plan sponsors. Benna says the company folded due to lack of interest. Surprising, since there has been such a focus on 401(k) plan fees in the past decade and a number of lawsuits targeting these fees. But, Benna notes more than 90% of plans cover less than 100 employees, and those are not generally on the screen as far as lawsuits, and “they don’t have to write out a check so it’s no pain to them. That’s the biggest reason for indifference.

Benna has since drafted a book about the history of the 401(k) and fees and “how we got into mess we’re in.” He says, “Whatever time I have left, I will focus on plan fees.”

NEXT: Is there any system to ensure retirement security?

According to the Wall Street Journal article, market downturns showed Benna that individual savers have too many opportunities to make mistakes, such as yanking money out during market downturns or selecting unsuitable investment mixes for their ages. He said he doubts “any system currently in existence” will be effectual for the majority of Americans.

Benna says the problem with DB plans is they allow for promised benefits to not be fully funded. “I’m a hard believer that every system DB-based or DC-based faces a serious risk in 20 or 30 years. Even state DBs are severely underfunded, and multiemployer plans are in trouble while we’re in robust stock market. What happens when next downturn hits?” He also mentions the financial troubles of the Social Security System.

However, Benna does see some solutions to enhancing the retirement security of Americans. He says he agrees with many points in the proposals by Professor Teresa Ghilarducci, Bernard and Irene Schwartz, Chair of Economic Policy Analysis at the New School for Social Research. However, he feels the radical changes she suggests will be politically difficult.

According to Benna, an easy way politically for Congress to do something is to give participants in DC plans the ability to put their money in the federal Thrift Savings Plan (TSP) as competition to the private sector. “The plan is already there, well structured, well designed and an inexpensive way of investing,” he notes. He says an alternative is to permit individuals to move out of DC plans to a traditional IRA—one not in existence now—that limits fees, for example, to 25 bps. Benna even suggests enrolling new workers into the TSP and bumping them out of the Social Security program. Their contributions and employer contributions except for Medicare would go into the TSP.

Benna also supports the idea of changing law so DC participants can’t take cash when they change jobs, but have to continue to invest their assets in retirement. In addition, he supports requiring annuitization at retirement. “Not necessarily buying an annuity, but requiring assets to be drawn down over the lifetime of the participant and spouse,” he says. “One idea is to offer a tax incentive to annuitize. Maybe the first $1,000 per month converted into a lifetime annuity is not taxable.”

Benna says these are things that are not a total revamp of the system but incremental improvements and actionable now.

NEXT: A new era for DC plans

Lori Lucas, defined contribution practice leader at Callan in Chicago, tells PLANSPONSOR a critical thing to recognize about the DC plan market is that in 2006, the Pension Protection Act (PPA) created a sea of change and set the stage for dramatic improvements that have been seen in the past 10 years.

The PPA considered problems that plagued participants; they don’t save enough and they don’t invest well, Lucas notes. So, the PPA opened the door for use of automatic enrollment and a safe harbor for use of target-date funds (TDFs) as qualified default investment alternatives (QDIAs). “In our survey, two-thirds of large plans use auto enroll and of those, 77% use automatic deferral escalation,” she says. “It’s been a huge success story in getting plans to encourage savings. While the average default of 4% is still low, a cap of 30% is average for auto escalation. Getting participants to 15% total savings is a game changer for having adequate retirement.”

Also in its most recent survey, Callan found 88% of large plans use TDFs as their QDIA. “Getting participants out of the business of managing investments, which they can’t do well, scored well post-PPA,” Lucas says.

But she notes there are challenges; some people don’t have access to a DC plan, not every plan is robust, participants need to start saving when they are young and they should keep their money in the system. Lucas says various studies show a DC plan along with Social Security can replace a large amount of pre-retirement income if used well. “When we do analysis of retirement income replacement, we assume there will be Social Security, we’re not looking yet that DC plans will be the only source,” she adds.

Noting that the biggest concern with plan leakage is not loans but cashouts, Lucas contends it’s possible that new fiduciary rule opens the door to participants keeping their money in DC plans or rolling it over since there will be more fiduciary responsibility required around those conversations. 

The missing piece of the DBitization of DC plans is income in retirement, Lucas says. Right now there is a stalemate; plan sponsors have taken the position that it is not for them to offer a guarantee, unless they are offered a safe harbor for perpetuity. In the Callan survey, only 3.8% of plans offer in-plan guaranteed income for life products, and only 11% are considering it for 2017.

Lucas notes that two policy initiatives will clearly help—prevent participants from taking money from the plan unless there is a hardship and mandating participants have to save a certain amount. But, she concedes that there’s not much traction for these initiatives because mandates are not well accepted, but they could make a big difference. “Even the superannuation system in Australia still hasn’t solved the problem of people taking their money out and spending it. It’s complicated,” Lucas concludes.

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