Washington D.C. Employment Law Update : Washington D.C. Employment Lawyer & Attorney : Littler Mendelson Law Firm : Virginia, Tyson's Corner

is intended to assure retirement security for workers in all jobs regardless of income level by ensuring that financial advisers and similar persons are required to meet ERISA’s standards of fiduciary responsibility when providing investment advice. Taking into account significant changes in both the financial industry and the expectations of plan officials and participants who receive investment advice, the proposed amendments would change a thirty-five year old rule that we believe inappropriately limits the types of investment advice relationships that give rise to fiduciary duties.

Opening the hearing, Subcommittee Chairman Phil Roe (R-TN), however, claimed that the proposed changes represent a “dramatic shift” that “may well disrupt stable, effective relationships between retirement savers and service-providers.” He added that:

For more than 35 years, regulations surrounding fiduciary responsibility have provided certainty to employers and other retirement plan sponsors. Currently, an investment adviser is considered a fiduciary under the law if they offer individualized advice on a regulator basis for a fee. The fiduciary’s advice must be provided pursuant to a mutual agreement and be the primary basis for a resulting investment decision. However, the Labor Department has now decided to rewrite the rules of the road. Among other changes proposed by the department, fiduciary status would no longer hinge on whether advice was provided regulatory or served as the primary reasons for an investment decision. While we support looking at ways to enhance this important definition, the current proposal is an ill-conceived expansion of the fiduciary standard. It will undermine efforts by employers and service providers to educate workers on the importance of responsible retirement plan. Regrettably, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect.

Roe also criticized the EBSA for failing to properly consider the possible costs and fees associated with the rule and its potential impact on the IRA market.

During the hearing, Borzi explained that most retirement funds are invested in 401(k) plans and Individual Retirement Accounts (IRAs), which require employee participants to decide where and how their funds should be invested. According to Borzi, 35 years ago such plans were either not in existence or uncommon, and therefore the proposal to change the definition is in response to changes in the market. Borzi claimed that despite fact sheets and multiple public hearings on this subject, there remains a lot of misinformation about the requirements of the proposed rule. Her testimony included a chart outlining what broker-dealers are allowed and not allowed to do under the rule, and what actions do not make a person a fiduciary. Actions falling into the latter category include providing information about generally accepted financial and investment principles, issuing investment newsletters, participating in informal “water cooler” conversations, and discussing benefits of plan participation.

When asked why the EBSA would not consider re-issuing the proposed rule given the controversy it has generated from both political parties, Borzi claimed that this action was not necessary as no commenter has suggested an alternative structure subject to additional comment. Asked whether someone who is involved in a swap transaction becomes a fiduciary under the rule, Borzi responded that under the EBSA rule, the person would not be rendered a fiduciary, and that the final rule would clarify this point. A witness testifying at the hearing said that this response needs to be codified in binding legal language. An appraiser who provides an initial valuation of stock, however, would be considered a fiduciary under the rule, she explained.

During the second half of the hearing, the majority of panelists criticized the proposed rule, and urged the EBSA to re-propose it. Several panelists claimed that the rule would result in unintended consequences that are not outweighed by any clear, quantified benefits, especially since the EBSA, they argued, did not sufficiently carry out cost/benefit analyses of the rule. One witness pointed out that the agency did not perform an economic study of IRAs, and therefore one needs to be conducted and subject to public comment before a final rule is issued.

Others claimed that the rule would raise direct costs and increase risks associated with providing advice, and therefore cause many brokerage firms to leave the market. This result, they claimed, could potentially reduce the availability of investment advice and services, especially for small businesses.

Several witnesses also expressed concern that long-standing business practices in the financial services industry would suddenly be considered prohibited transactions under the rule, and that the DOL’s exemptions approach to address this problem is insufficient. According to one witness, “almost any discussion of investments would give rise to fiduciary status. So small business owners would face very serious potential liabilities and uncertainties if they or their managers respond to any employee inquiries regarding plan investments.” In addition, the feared lowering of the threshold for fiduciary status would raise “serious questions regarding which plan sponsor employees may be treated as fiduciaries.”

Yet another witness claimed that the proposed rule “directly conflicts with longstanding professional and regulatory standards of valuation practice requiring that an appraiser provide an independent and impartial opinion of value.”

A complete list of panelists, links to their testimony, and access to an archived web cast of the hearing can be found here.

Photo credit: Kirby Hamilton

Borzi defended the agency’s plan to forge ahead with a final rule despite calls that the proposal be re-issued. She claimed that the EBSA’s approach to arriving at a final regulation has consisted of three main steps. First, Borzi stated that the agency is “working to better understand how specific compensation arrangements would be affected by the proposed rule and whether clarifications of existing prohibited transactions exemptions would be appropriate.” She noted that the agency has already begun to issue sub regulatory guidance “describing some of these clarifications and will continue to do so as necessary as we complete our analysis.”

Second, in crafting the final rule, Borzi said that the EBSA is paying particular attention

to the two primary exceptions to fiduciary status under the proposed rule: (1) clarifying the difference between investment education that does not give rise to fiduciary status and fiduciary investment advice; and (2) clarifying the scope of the so-called “sellers’ exemption” under which sales activity is not fiduciary advice. In both cases, we will be directly addressing the comments and concerns that were raised during our extensive public comment period.

Third and finally, Borzi said that when the final rule is issued, the EBSA will also propose one or more “new prohibited transaction class exemptions and/or modifications to existing ones that may be useful to the regulated community so as to not unnecessarily disrupt existing compensation practices or business models, where we can make the requisite finding that the continuation of these activities is sufficiently protective of plan participants or IRA customers.” She noted that the agency is also considering whether to extend the applicability date in order to allow additional time to comply with the new rules. Borzi also defended the proposal against concerns over its interaction with new business conduct rules governing swaps transactions under the Dodd-Frank Act. Borzi claimed that: “we do not believe there are any fundamental inconsistencies with provisions of the new Dodd-Frank business conduct rules and the implementing regulations of the SEC and CFTC, such that the Department’s proposal would result in swap transactions being prohibited by ERISA’s prohibited transactions rules and we have made that belief clear to those who have inquired on that matter. In any event, we intend to make this conclusion clear as we address the issue in the final rule.”

The EBSA also intends to issue a final rule on ERISA’s prohibited transaction exemption that permits the provision of investment advice to participants or beneficiaries of certain individual account plans if the investment advice is provided under an “eligible investment advice arrangement.” She also stated that “there may be implications in applying the prohibited transaction rules of ERISA to current investment practices, particularly in the context of IRAs” in defining who is a fiduciary. Borzi claimed that since the agency has broad authority to issue exemptions from the prohibited transaction rules of ERISA, it would ensure that beneficial advice practices would be permissible, “even if they would otherwise be technical violations of the statute.”

Another popular topic of discussion during the online chat was the 408(b)(2) fee disclosure rule, which sets forth enhanced disclosures that certain pension plan service providers must give to plan fiduciaries as part of a “reasonable” contract or arrangement for services under section 408(b)(2) of ERISA. During the chat, Borzi explained that the EBSA published an interim final rule on this issue in July 2010, and sought public input “on a few discrete issues.” According to Borzi, “the comments were supportive and confirmed our belief in the basic structure of the rule. When fully implemented, this regulation will give plan fiduciaries valuable information about service provider compensation and revenue sharing, and the disclosure of this information will benefit millions of participants and their families.” She claimed that the rule will be finalized “in plenty of time for stakeholders to adapt their systems to any changes from the interim final to the final regulation in anticipation of the applicability date of the 408(b)(2) regulation on April 1, 2012, which was just announced this week by the department.”  Borzi commented that the agency is also moving forward with its related welfare plan fee transparency initiative. The welfare plan initiative involves consideration of whether, and to what extent, service relationships in the welfare plan context should be subject to similar fee and compensation disclosure requirements.

With respect to a final rule implementing the requirement that the administrator of a defined benefit pension plan provide participants, beneficiaries, and other parties with an annual funding notice, Borzi stated that the Department is reviewing a number of comments to the proposal, and that it expects a final regulation to be published by January 2012.

Borzi also mention that new to the Spring 2011 semi-annual agenda is a Request for Information Regarding Electronic Disclosure By Employee Benefit Plans. Borzi described the development as initiating “a conversation on whether, and possibly how, to expand or modify the Department’s electronic disclosure rules for employee benefit plan information.”

A few chat participants asked about the EBSA’s longer-term regulatory initiatives implementing provisions of the Affordable Care Act. When asked when the agency planned to issue guidance on automatic enrollment in health plans and the provision of a summary of benefits as required by the Act beginning March 23, 2012, Borzi claimed that the DOL, Department of Health and Human Services, and the Treasury Department “are actively working to issue a proposed rule as soon as possible.” Similarly, the three agencies are collaborating on rules to implement the auto-enrollment provision, and will issue guidance in the future. Borzi reminded participants that until regulations are issued and effective, employers are not required to comply with the auto-enrollment provisions.

Another chat participant asked wither early retiree welfare benefit plans must follow annual and lifetime maximums under the Affordable Care Act. Borzi responded:

if a plan covers less than two participants who are active employees (including some retiree-only coverage, depending on how the plan is structured), the PHS Act section 2711 rules prohibiting lifetime limits and restricting annual limits do not apply. The key issue is often a factual one as to whether the plan is structured so that it does not cover two or more active employees. It does not matter if a retiree is an early retiree or is age 65 or older.

Other information provided during the chat include the following:

• As part of the EBSA’s “lifetime income” initiative, the agency “is considering, as part of the pension benefit statement regulatory initiative, requiring that pension benefit statements for defined contribution plans express the participant's ‘total accrued benefit’ in the form of a lump sum account balance and in the form of a lifetime income stream.”
• The agency is working on proposed regulations that will be published later this year or early 2012 that will address pension benefit statements under ERISA section 105(a) and recordkeeping and reporting requirements under ERISA section 209(a).
• When asked whether under the participant-level fee disclosure and self-directed balance forward retirement plans a plan sponsor could designate all of the investment options as "self-directed brokerage accounts" to circumvent the intent of disclosure to participants, Borzi stated that the rule “has specific provisions on self-directed brokerage windows accounts. If we see conduct designed to circumvent the clear intent of the regulation that would likely lead to an enforcement action.”

A complete transcript of the web chat can be found here.

Photo credit:  maxexphoto

The interim final rule issued in July sets forth enhanced disclosures that certain pension plan service providers must give to plan fiduciaries as part of a “reasonable” contract or arrangement for services under section 408(b)(2) of ERISA. Unless extended, the date this rule is scheduled to take effect is July 16, 2011. In February, the EBSA announced its intention to extend this applicability date to January 1, 2012. The EBSA’s notice to be published in the Federal Register, if finalized, will effectuate this announcement.

The final participant-level disclosure rule issued in October requires retirement plan sponsors and fiduciaries to disclose certain plan and investment-related information, including that related to fees and expenses, to participants and beneficiaries in participant-directed individual account plans, such as 401(k)s. The provisions of this regulation apply to plan years beginning on or after November 1, 2011. These regulations also include a transitional rule for providing disclosures required on or before the date on which a participant or beneficiary can first direct his or her investment. This transitional rule provides that the plan must provide the new disclosures no later than 60 days after participants or beneficiaries have the right to direct the investment of their individual accounts. The EBSA’s proposal would allow a plan to furnish these initial disclosures within 120 days, rather than the current 60. Additionally, under the EBSA’s proposal, plans would have to furnish initial disclosures to all participants and beneficiaries who have the right to direct their investments when such disclosures are furnished, not just to those who had the right to direct their investments on the plan applicability date. The purpose of this change “is to ensure that individuals who become plan participants in between the applicability date and the end of the 120-day period receive the important information required under the regulation.”

Comments on these proposed extensions must be received within 14 days of the EBSA’s Federal Register notice, which is scheduled to be published on June 1, 2011. Comments may be submitted electronically to e-ORI@dol.gov, or via the federal eRulemaking portal or by mail or hand-delivery to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N–5655, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210, Attention: Fee Disclosure Applicability.

Photo credit: Kameleon007

As stated in an EBSA press release about this request, the MHPAEA – among other things – creates new rules for any financial requirement (e.g., cost-sharing) or treatment limitations (e.g., visit limits) on mental health and substance use disorder benefits so that they are no more restrictive than predominant requirements or limitations applied to substantially all medical and surgical benefits covered by a plan. MHPAEA also reauthorized several provisions relating to parity in annual and lifetime dollar limits for group health plan coverage enacted as part of the Mental Health Parity Act (MHPA) of 1996.

The RFI seeks public comment to assist in the development of MHPAEA regulations, and to perform a cost-benefit analysis of initiating this proposed rulemaking. To that end, the EBSA has posed a number of questions, including the following:

• What policies, procedures or practices of group health plans and health insurance issuers may be impacted by MHPAEA? What direct or indirect costs or benefits would result, and to whom?
• Are there unique costs and benefits for small entities subject to MHPAEA (that is, employers with greater than 50 employees that maintain plans with fewer than 100 participants)? What special consideration, if any, is needed for these employers or plans? What costs and benefits have issuers and small employers experienced in implementing parity under state insurance laws or otherwise?
• Are there additional paperwork burdens related to MHPAEA compared to those related to MHPA 1996, and, if so, what estimated hours and costs are associated with those additional burdens?
• How do plans currently apply financial requirements or treatment limitations to (1) medical and surgical benefits and (2) mental health and substance use disorder benefits? Are these requirements or limitations applied differently to both classes of benefits? Do plans currently vary coverage levels within each class of benefits?
• What terms or provisions require additional clarification to facilitate compliance? What specific clarifications would be helpful?
• What information, if any, regarding the criteria for medical necessity determinations made under the plan (or coverage) with respect to mental health or substance use disorder benefits is currently made available by the plan? To whom is this information currently made available and how is it made available? Are there industry standards or best practices with respect to this information and communication of this information?
• Which aspects of the increased cost exemption, if any, require additional guidance?

Comments responding to the MHPAEA RFI must be submitted on or before May 28, 2009. Written comments may be addressed to the U.S. Department of Labor, Office of Health Plan Standards and Compliance Assistance, Employee Benefits Security Administration, N-5653, 200 Constitution Avenue N.W., Washington, D.C. 20210, Attn: MHPAEA Comments. Comments may also be submitted electronically by email to E-OHPSCA.EBSA@dol.gov or through the federal e-rulemaking portal at www.regulations.gov.