Art by J. Ciardiello“I’ve Got a Little List, And they’ll none of ’em be missed”—W.S. Gilbert (of Gilbert and Sullivan)
As has been widely discussed, the Obama Administration’s policy of acting through Executive Order and regulation, rather than through legislation, has left the current Administration’s policies vulnerable to repudiation by the incoming Trump Administration, by identical, unilateral means.
As Department of Labor (DOL) Employee Benefit Security Administration (EBSA) Assistant Secretary Phyllis Borzi famously said, “So what we’ve done is we’ve shifted from the way that social change and legal change and financial change is accomplished through congressional action to two different avenues for making changes: The main one being regulation and the second one being litigation.” The problem is, if a new Administration comes into office with different views on “social change,” and is prepared to view lawmaking in a similar way (as a function of Executive rather than Congressional action), it doesn’t take much to undo what’s been “accomplished.”
I want to return to this issue of process at the end. But first, here is my “little list” of Obama DOL/EBSA agency action that I think the incoming Trump Administration should take a serious look at and consider, one way or another, repealing.
The Conflict of Interest regulation. The possible reopening of the Conflict of Interest regulation—which is “final” but not yet applicable—has been getting lots of press. In my humble opinion, the rule’s application of Employee Retirement Income Security Act (ERISA) fiduciary standards to IRAs and the “fiduciary-ization” of advice concerning distributions should be revoked and those issues turned over to the Securities and Exchange Commission (SEC). But repeal is not a no-brainer. There will be considerable opposition and many providers have already taken significant steps to adapt to the new rules. Whoever is running the Trump EBSA will want to make sure that there is broad support for whatever changes are made.
Policy on 401(k) fee issues generally. The Obama EBSA has made 401(k) fees the centerpiece of its retirement plan regulatory efforts, beginning with major fee disclosure regulations in 2010 and 2011 and then the Conflict of Interest rule in 2016. It has also introduced fee issues into other, seemingly unrelated initiatives, including the brokerage window guidance project, the Target Date Fund Tip Sheet and the Pension Protection Act advice regulation.
The Trump Administration will want to reassess the significance of fees as a regulatory issue. Is this “war on providers” really justified, or is price competition better left to the market?NEXT: State plans, an annuity safe harbor and more
Form 5500 revision. Two industry groups—the American Benefits Council (ABC) and the ERISA Industry Committee (ERIC)—have already called for withdrawal and reconsideration of the proposed revision of the Form 5500. The proposal has been criticized for, among other things, requiring increased detail on asset holdings the collection and reporting of which is likely to be more trouble than it is worth, and for a proliferation of compliance questions that, many believe, don’t really belong in an annual report. I don’t see a big constituency for the imposition of these additional burdens on sponsors. Reconsideration of this proposal looks, to me, like low-hanging fruit.
The state plan initiative. The Obama EBSA has, through regulations and other guidance, aggressively moved to create a “path forward” for state private retirement program initiatives, removing concerns about ERISA coverage and ERISA preemption wherever it can. Most recently, it extended this relief to certain cities. Under this “path forward,” rules that prevent private sector providers from providing, e.g., auto-IRAs or open multiple employer plans (MEPs), don’t apply to states. EBSA explains this bias in favor of state solutions over private-sector ones as based on states’ “unique representational interest in the health and welfare of its citizens.”
I word urge the Trump EBSA to move aggressively to extend the ability to offer auto-IRAs and open MEPs to private-sector providers. Frankly, I think that private providers (regardless of how venal) will do a much better job, by any measure, of providing retirement services than any state or city bureaucracy (regardless of how virtuous) can.
Electronic participant communications. I believe that our entire business should be re-engineered front-to-back to bring it into the 21st century. Just to give an example—I think the drafting of retirement plans should be reduced to a menu. Perhaps that is utopian. But an easy and good place to start would be to move the rules for participant communication into the electronic age. Unlike the Internal Revenue Service (IRS), the Obama DOL/EBSA has been reluctant to move away from paper-based participant disclosure. It is very much past the time for that policy to change.
DC annuity safe harbor. Most sponsors—other than those who exclusively use an insurance company product—are reluctant to add an annuity option to their 401(k) plan. They’re worried that if, 15 years after a participant retires, the annuity carrier becomes insolvent, the plan fiduciary may be on the hook for participant losses. DOL provided a “safe harbor” for in-plan DC annuities in 2008, but sponsors have generally not viewed it as particularly “safe.” It still requires a thorough and prudent selection process, including a judgment about the capacity of the annuity carrier to pay future annuity commitments.
The American Council of Life Insurers (ACLI) has proposed addressing this issue of insurer insolvency risk by deferring to state insurance regulation. DOL authorization of that approach would be a welcome step forward.NEXT: A better regulatory process
Finally, three points about EBSA’s regulatory process: First, while there are some things that the Obama Administration has done—particularly regulation and guidance that has not had broad support—that should be simply un-done, my hope is that in crafting a Trump retirement plan regulatory agenda the new Administration will not simply do what it wants and the opposition be damned. The (likely) failure of many Obama Administration regulatory initiatives to outlast President Obama’s tenure should be an object lesson. I believe—intensely—that Ms. Borzi is wrong, that the only way to change policy is through unilateral agency action, plus litigation. Instead, I think that regulators should seek to fashion rules that reflect a broad consensus about the right way forward, consider all points of view and take proposals for fundamental policy change to Congress.
Second, and in that regard, the use by the Obama (and prior) Administrations of informal procedures, including, e.g., changing instructions to the Form 5500, to make fundamental rule changes has to stop. The notice and comment process is very effective at identifying problems that are not obvious when regulators sit down to solve a problem. DOL should respect it.
Third, and in that regard, DOL should, in my humble opinion, be moving the regulatory process along much faster. Case in point: DOL has had under consideration since 2013 a project on lifetime income disclosure and still hasn’t been able to produce a proposed regulation. There is a broad consensus in support of this project, although there are differences over the details. What is wrong with the current process that it takes so long to make it work? Is it the DOL bureaucracy? Problems at the Office of Management and Budget (OMB)? A reluctance to simply make a decision?
I am looking forward to a Trump DOL/EBSA. I realize that there are a lot of concerns among Democrats—and those may be justified at other agencies or indeed with respect to the broad policy thrust of the new Administration.
But I think at EBSA there is an opportunity to make real progress on improving the current system, without tearing up ERISA’s basic infrastructure or doing damage to a bipartisan consensus.
Michael Barry is president of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has 40 years’ experience in the benefits field, in law and consulting firms, and blogs regularly http://moneyvstime.com/ about retirement plan and policy issues.This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International or its affiliates.
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