Reflections on a Dramatic Year for Retirement Plan Regulation

On the opening day of the 2018 PLANSPONSOR National Conference in Washington, D.C., trusted Employee Retirement Income Security Act (ERISA) attorneys dove deep into the latest legislation, regulation and judicial actions affecting retirement plan sponsors and participants.

Closing out the first day’s panel discussions, conference attendees heard detailed commentary from David Levine, principal at Groom Law Group, and Jodi Epstein, a partner with Ivins, Phillips and Barker. The pair walked attendees through a laundry list of compliance concerns, starting with the implications of the Department of Labor (DOL) fiduciary rule being vacated by the 5th U.S. Circuit Court of Appeals. As Levine and Epstein explained, that decision threw a dramatic new element of confusion into the epic regulatory saga that has been the rollout of the fiduciary rule—crafted as it was by the Obama administration but left to the more or less opposite-minded Trump administration to implement.

Levine and Epstein noted that, while some retirement plan advisers may be relieved to see the DOL fiduciary rule tossed aside by an appeals court, retirement plan sponsors now face the challenging and perplexing task of identifying what this unexpected reversal means for all of their various service provider relationships. The matter is made even more difficult considering the emerging effort at the Securities and Exchange Commission (SEC) to tackle some of the same issues through its own Regulation Best Interest. The SEC’s release of a thousand-page conflict of interest rulemaking package, applying to all brokers and investment advisers whether they serve retirement plans or retail clients, is being hailed as a victory by some and a deep disappointment by others; either way, it’s the start of another long chapter in the epic industry battle over federal conflict of interest regulations.

“Sponsors are naturally wondering, what are my service providers going to do?” Levine observed. “With the defeat of the DOL rule and the SEC potentially picking up the task of more aggressively policing conflicts of interest, they wonder, what does it all mean?”

At this interim stage there is not a whole lot of practical advice to give plan sponsors apart from urging them to take time to study and understand what each service provider is doing in terms of either taking on fiduciary status or avoiding it. The attorneys agreed it is especially important to do this analysis with respect to a plan’s recordkeeper, given that recordkeeping service models and compensation have shifted substantially in the last several years as the DOL fiduciary rulemaking unfolded. But it is also important to carefully run such an analysis when it comes to all of the other service providers touching the retirement plan—including for your services as the adviser.

Moving on to the topic of recent legislative changes that plan sponsor clients must consider, Epstein and Levine pointed to several key provisions embedded in the 2017 Tax Cuts and Jobs Act. For example, while the topic didn’t receive much attention during the debate and passage of the tax cut package, the law in fact made substantial changes to the safe harbor that surrounds participant hardship withdrawals.  

The two warned that the tax cut law also impacted the definition of compensation for the purposes of both defined contribution (DC) and defined benefit (DB) plans—so it will behoove plan sponsor clients to carefully check plan documents and ensure they understand how they define compensation as well as ensure they meet the requirements of the new tax law. Epstein pointed to the particular example that employees’ reimbursed moving expenses now count as compensation.

When it comes to the long list of examples of retirement reform legislation circulating around Congress, Epstein and Levine said they are most closely following the effort to expand access to so-called “open multiple employer plans,” or open MEPs. Both also warned that there is some increasing chatter on the Hill to the effect that another round of tax reform could be high on the agenda for the remainder of 2018—and, as a part of this, there could be another round of debate about the “Rothification” of the 401(k) plan industry.

Concluding the panel discussion, Epstein and Levine noted that the subject of missing participants has become a major focus of DOL and IRS audits in 2017 and 2018. Both said they have seen DOL and IRS auditors dive deep into plan sponsors’ stated policies and procedures for locating missing participants—and they very often find plan sponsors at fault for not making a good faith effort to locate them. The attorneys said it is absolutely crucial for plan sponsors to review their procedures for this topic and make sure they know what their recordkeeper and other service providers are doing, or perhaps more importantly, not doing.

“You need to have a process for finding beneficiaries, as well,” Levine pointed out. “We highly recommend rechecking your fiduciary breach insurance coverage, to see whether it covers this topic. In a phrase, it should.”