Legislative and Judicial Actions

Art by Johnny Dombrowski

Transitional Relief for Investment Advice Rules

The Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) has issued Field Assistance Bulletin (FAB) 2021-02, “Temporary Enforcement Policy on Prohibited Transactions Rules Applicable to Investment Advice Fiduciaries.” The FAB provides that investment advice fiduciaries now have until January 31, 2022, to comply with the impartial conduct standards included in fiduciary prohibited transaction exemption (PTE) 2020-02, which the DOL announced at the end of last year.

For context, effective this February 16, the DOL implemented an expanded definition of “fiduciary advice.” Experts say this new definition will cause many registered investment adviser (RIA) services that were previously considered nonfiduciary under the Employee Retirement Income Security Act (ERISA) to now be deemed prohibited transactions and subject to a fiduciary best interest standard of conduct. PTE 2020-02, also implemented on February 16, supplies the conditions under which fiduciaries who give investment advice to ERISA-covered pension plans and individual retirement accounts (IRAs) have the latitude to recommend rollovers and receive compensation.

Prior to this, in 2018, the 5th Circuit Court of Appeals had vacated the DOL’s 2016 regulations reinterpreting ERISA’s definition of “fiduciary.” In 2017, the Trump DOL issued a temporary nonenforcement policy—in FAB 2017-02 and reissued in FAB 2018-02—stating the agency would not pursue prohibited transaction claims against investment advice fiduciaries who work diligently and in good faith to comply with the impartial conduct standards the agency had subsequently supplied. This nonenforcement policy was due to expire this December 20.

The DOL extended the date, saying it understands that a December 20 deadline posed practical difficulties for financial institutions. These institutions expressed concern that they would incur significant additional costs to distribute disclosures, because December 20 does not align with their regular distribution cycle for disclosures.

They also had asserted that the expiration date would make it hard to conduct the required retrospective review on a calendar-year basis. Further, the DOL says, the institutions maintained that they faced significant challenges in implementing the rollover documentation and disclosure requirements in a sufficiently automated and systematic manner by the deadline and these challenges and concerns could have delayed their ability to rely on the exemption as the department intended.

Benefit Limits for Qualified Plans for 2022

The IRS has announced, in Notice 2021-61, that the contribution limit for employees who participate in 401(k), 403(b) and most 457 plans, as well as the federal government’s Thrift Savings Plan, will increase to $20,500, up from $19,500 this year. The catch-up contribution limit for employees ages 50 and over enrolled in the aforementioned plans remains unchanged at $6,500.

The limitation regarding SIMPLE [savings incentive match plan for employees] retirement accounts will increase from $13,500 to $14,000.

The defined benefit (DB) plan annual benefit limit under Section 415(b)(1)(A) of the Internal Revenue Code (IRC) will increase from $230,000 to $245,000. For a participant who has separated from service before January 1, 2022, the DB plan benefit limit under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2021, by 1.0534. The limitation for defined contribution (DC) plans under Section 415(c)(1)(A)—i.e., annual additions—has been increased for next year from $58,000 to $61,000. The limitation used in the definition of “highly compensated employee” under Section 414(q)(1)(B) will increase from $130,000 to $135,000.

RISE Act Advances With Various Retirement Plan Provisions

The U.S. House Committee on Education and Labor has voted unanimously to advance legislation introduced earlier in November that would improve access to retirement plans for employees and ease plan administrative burdens for employers.

The Retirement Improvement and Savings Enhancement (RISE) Act (H.R. 5891) includes provisions introduced in other pieces of legislation, including the Securing a Strong Retirement Act, often called “SECURE 2.0,” a reference to 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act. SECURE 2.0 was passed unanimously by the House Ways and Means Committee in May.

According to a fact sheet about the RISE Act, the legislation would establish an online, searchable “Retirement Lost and Found” database at the Department of Labor (DOL) to help workers keep track of their retirement savings as they move from job to job; allow 403(b) retirement plans to participate in multiple employer plans (MEPs) and pooled employer plans (PEPs); ensure more part-time workers are offered opportunities to join a retirement plan; clarify rules on the recovery of inadvertent overpayments to retirees, minimizing hardships; enable employers to provide small financial incentives, such as low-dollar gift cards, to encourage workers to participate in retirement plans; and simplify and clarify reporting and disclosure requirements related to retirement plans.

SEC Actions Underscore Adviser Risks, Responsibilities

Experts watching the regulatory actions of the Securities and Exchange Commission (SEC) note that the new leadership under the Biden administration has refocused the role of the securities market regulator to prioritize what is in the best interest of investors, as opposed to favoring the commercial interests of registered investment advisers (RIAs), broker/dealers (B/Ds) and fund distributors.

To this end, the SEC’s division of examinations recently concluded a series of reviews to assess the practices of advisers providing robo-advisory services and to ensure that advisers are accurately and fairly assessing and collecting their fees. As the SEC leadership explains in the first of two risk alerts, millions of investors, individually and through their employer-sponsored retirement plans, now entrust their savings to advisers who provide their investment advisory services online, via automated mobile apps and desktop computer programs.

In the SEC’s view, the use of such services can raise important investor protection implications. The SEC warns that a robo adviser’s client-survey-and-monitoring process may not appropriately capture a given client’s risk tolerance, which could result in the provision of advice to invest in securities not aligned with the client’s best interest. An added consideration with the development and delivery of automated and highly scaled robo-advisory services is that failures may be repeated many times over before they are noticed and corrected, magnifying the negative impact of problems that arise.

The second risk alert offers insight on compliance issues arising from investment advisers’ fee calculations. For this alert, the SEC’s examinations staff conducted about 130 reviews of SEC-registered investment advisers, identifying various deficiencies related to the advisory fees charged by many firms. As the risk alert explains, these deficiencies often resulted in financial harm to clients, including from over-billing of advisory fees, the inaccurate calculation of tiered or breakpoint fees, and the inaccurate crediting back of certain fees due to clients, especially prorated fees for onboarding them or prepaid fees for terminated accounts.

Recognizing that there is no such thing as a one-size-fits-all approach, the SEC staff closes the risk alert by providing observed examples of policies and practices, to assist advisers with compliance in these areas.

PBGC Insurance Programs Report Positive Positions

The Pension Benefit Guaranty Corporation (PBGC) has released its Fiscal Year 2021 Annual Report, which shows that its multiemployer plan insurance program has a positive net position of $481 million—a sharp contrast to the program’s deficit of $63.7 billion at the end of fiscal 2020.

The agency’s multiemployer plan program will now likely remain solvent for more than 30 years, due to the enactment of the American Rescue Plan Act (ARPA) of 2021. ARPA created a special financial assistance (SFA) program, which the PBGC estimates will provide funding to more than 250 severely underfunded pension plans covering more than 3 million Americans.­

The PBGC’s single-employer plan insurance program also saw year-over-year improvement. It had assets of $150.7 billion and liabilities of $119.8 billion as of September 30. The positive net position of $30.9 billion reflects an improvement of $15.4 billion from the program’s $15.5 billion net position in fiscal 2020. During fiscal 2021, according to the agency, it paid more than $6.4 billion in benefits to nearly 970,000 retirees in terminated single-employer plans. The PBGC also assumed responsibility for the benefit payments of nearly 34,000 workers and retirees in 47 single-employer plans trusteed this fiscal year.

Outdated Mortality Table Suit

Huntington Ingalls Industries has agreed to settle a lawsuit claiming it used outdated mortality tables to calculate monthly benefits for participants and beneficiaries in the “legacy” part of the Huntington Ingalls Industries Inc. Newport News Operations Pension Plan for Employees Covered by United Steelworkers Local 8888 Collective Bargaining Agreement.

The complaint stated that the defendants calculated an annuity conversion factor, and thus the present value of the non-single life annuities (SLAs), for the legacy part of their pension plan using a so-called 1971 Group Annuity Mortality Table. Beyond projecting that both men and women will live shorter lives in retirement compared with predictions from newly prepared tables, the 1971 table assumes 90% of the company’s employees are male and 90% of contingent annuitants are female—all while using a 6% interest rate.

The lawsuit was among a number of similar suits filed against large companies over the past three years.

Summary of Hardship Withdrawal Rules

In an Issue Snapshot, the IRS has summarized changes made to hardship withdrawal rules by the Bipartisan Budget Act of 2018 and subsequent IRS regulations. The rules:

• Delete the six-month prohibition on contributions to a retirement plan following a hardship withdrawal—mandatory for plan sponsors to adopt;
• Extend the allowance of hardship withdrawals to include contributions to a profit-sharing or stock bonus plan, qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs);
• Now allow earnings on the contributions;
• Eliminate the requirement to take a loan before requesting a hardship—this is optional for plan sponsors, which may still require the participant to take a loan first;
• Add the following to the safe harbor list of expenses for which distributions may be made on account of an immediate and heavy financial need those incurred by the “primary beneficiary under the plan” for qualifying medical, educational or funeral expenses; a deduction under IRC Section 165 for damage that would qualify as a casualty, to a principal residence not in a federally declared disaster area; and a new type of expense relating to costs resulting from certain disasters (a plan need not allow hardship distributions for all safe harbor expenses);
• Clarify that plans could require a minimum amount for hardship distributions, provided the minimum is nondiscriminatory;
• Change requirements for proving a heavy financial need in these ways: as of 2020, an employee may make a representation that he has insufficient cash or other liquid assets reasonably available to satisfy a financial need even if the employee does have cash or other liquid assets on hand, provided that those assets are earmarked to pay an obligation in the near future such as rent; and
• Now permit employee representations to be made over the phone, provided that the call is recorded—the plan administrator may rely on the employee’s representation unless the plan administrator has actual knowledge to the contrary.

Walgreens Settles Suit Over TDFs

Plaintiffs in a lawsuit alleging that fiduciaries of the Walgreen Profit-Sharing Retirement Plan breached their fiduciary duties by selecting and retaining historically poorly performing Northern Trust target-date funds (TDFs) for the plan have filed a motion for preliminary approval of a settlement agreement. Besides listing the settlement provisions, a memorandum of law states that the TDFs have already been removed from the plan.