PSNC 2015: The Regulatory Environment

Forty-four percent of attendees at the PLANSPONSOR National Conference in Chicago said they are somewhat challenged to keep their retirement plans compliant in a shifting regulatory landscape, and it is getting more difficult.

Indeed, rulemakers, lawmakers and the courts have been very busy in the past year or so. Marcia Wagner, the president and founder of Wagner Law Group, noted there is great change on the regulatory front, with a new proposal regarding the definition of fiduciary under the Employee Retirement Income Security Act (ERISA), rules for using qualified longevity annuities in retirement plans and rules for using annuities in target-date fund (TDF) offerings. “Lifetime income is the direction the Department of Labor (DOL) and Internal Revenue Service (IRS) are moving in,” she told conference attendees.

David Levine, principal of Groom Law Group Chartered, noted that the greatest stumbling block to adopting annuities in retirement plans is the question of their fiduciary risk. The DOL has provided safe harbor rules for selecting annuity products, but the rules say “appropriately” select and review. According to Levine, it has been on the DOL’s agenda for a while to clarify what “appropriately” means exactly. He thinks in the next year, the agency will move to clear that up. He told plan sponsors the important thing is to document selection and review processes.

The proposed fiduciary rule is also linked to retirement income in some ways, as it pulls plan rollovers into individual retirement accounts (IRAs) into the areas the DOL wants to protect. For plan sponsors, though, the biggest impact will be how services are rendered to the plan and participants, Levine said. Wagner added that plan sponsors will see an effect on the quality of help they receive, fee compression and new service provider contracts. Both Wagner and Levine agree the rule will change during the regulatory process, but the final result will still focus on transparency, and plan sponsors will be subject to the repapering of contracts.

Wagner also noted some big changes on the judicial front for plan sponsors, including the Supreme Court decision in Fifth Third v. Dudenhoeffer whereas plan sponsors that offer company stock in their investment lineup do not have a presumption of prudence, and the Supreme Court decision in Tibble v. Edison, establishing that the duty to monitor investments is ongoing and just as important as the duty to prudently select investments. “Plan sponsors should monitor their investments with the same level of diligence as they select investments initially,” Wagner says.

She also noted that there currently is a case before the Supreme Court that will determine whether states in which same-gender marriage is illegal have to recognize same-gender marriages performed in other states.

Finally, Wagner mentioned discussion by lawmakers about how to handle data breaches of retirement plan participant data—should this be governed under ERISA or fall under state law? “The question is, ‘Is the data about a retirement plan a plan asset that should be protected under the duty of prudence?’” she said.

Until that question is answered, Wagner recommends plan sponsors only allow certain people access to retirement plan participants’ private information, make sure they know vendors’ protocols for protecting data, and ask if vendors will indemnify the plan sponsor if a data breach occurs on a vendor’s watch. She also said plan sponsors should establish a best practice protocol for backing up data and employ a privacy officer or at least work with counsel to establish best practices.

However, Levine disagreed, saying if plan sponsors are not sure they can follow through with protocols or practices, they shouldn’t create policies on paper that attorneys can come after them for not following. He said, however, that plan sponsors should check their overall insurance policies to see if cyber policies include ERISA plans.