Sifting Through Retirement Plan Regulations

Understanding the hierarchy of regulations and how plan sponsors should interpret seemingly conflicting ones.

Attend any retirement industry conference held in 2018 and it will almost certainly include presentations on the topic of evolving and conflicting regulation.

Indeed, at the upcoming PLANADVISER National Conference (PANC) event, we have planned multiple discussions and workshops on the “uncertain regulatory environment.” And at our PLANSPONSOR National Conference (PSNC), held earlier this summer in Washington, D.C., we presented literally hours of panel discussions and presentations on the goings-on at the Department of Labor (DOL), in Congress, at the Internal Revenue Service (IRS), etc.

One question that came up repeatedly from attendees at PSNC went pretty much like this: What is the real source of the almost comical amount of regulatory uncertainty impacting retirement plans, and how can plan sponsors or even their skilled advisers be expected to keep up with the myriad twists and turns? And a related question involved how to set aside the uncertainty and do the hard work of practically interpreting the different levels of regulation put out by entities like DOL and IRS—from “field assistance bulletins” and “interpretative bulletins” to “guidance letters” and “private letter rulings.”

Perhaps the quintessential example of regulatory flux has been the saga surrounding the DOL fiduciary rule proposal, experts agree. But an even more recent and equally informative example presents itself in the DOL’s seeming flip-flop surrounding the treatment of environmental, social and governance (ESG) investing programs under the Employee Retirement Income Security Act (ERISA).

Making sense of it all

As discussed by David Levine, principal with Groom Law Group, and Jodi Epstein, partner with Ivins, Phillips and Barker, a lot of the confusion having to do with perennial regulatory uncertainty comes out of the simple fact that the core beliefs and priorities of presidential administrations tend to swing dramatically over relatively short periods of time. This is especially true when control of the White House repeatedly flips from one party to the other, leaving precious little time for the executive branch’s unilateral decisions to really sink in. An example is the way the election of Donald Trump quashed the future of the DOL fiduciary rule.

“In the latest case concerning ESG issues under ERISA, we now have a new Field Assistance Bulletin 2018-01, which was crafted and published by the Trump administration,” Epstein explains. “While the field assistance bulletin is lengthy and detailed, it technically does not carry as much weight as the previous interpretative bulletin on the topic, which is actually still in effect and known as Interpretive Bulletin 2015-01.”

That bulletin was crafted by the Obama administration and essentially returned the ESG investing paradigm back to the way things worked between 1994 and 2008—i.e., before president Bush set his own stamp on the matter—by superseding Interpretative Bulletin 2008-01. It’s quite a confusing picture, especially for those who are not particularly interested in tracking the minutia of executive branch labor regulations.

“Where are we left right now? In fact we are in the same place we were under the Obama administration, despite the tone of the field assistance bulletin put out by the Trump administration. The FAB 2018-01 is simply a reminder about what was really established by 1994-01,” Epstein explains. “The new field assistance bulletin did not actually change the underlying regulation, but instead it strives to clarify what the DOL’s current interpretation of the relevant laws and statutes is. Confused? That’s understandable, because pretty much everyone is.”

Roughly speaking, one can generally say that interpretative bulletins (IBs) are higher up on the totem pole versus field assistance bulletins (FABs). And both of these fall below bona fide “rulemaking.” While it may not be obvious at first, by paying very close attention to the language of each new regulatory release, one can get a sense of where it fits into the broader picture.

“The field assistance bulletins are important but they do not technically create a new interpretation of what the underlying regulations are,” Epstein explains. “In fact, field assistance bulletins are just that—they are created not as a new regulations but instead to help DOL staffers, literally in the field, understand how to do their job. It’s a little lower down the chain, and put simply, an FAB does not supersede the IB. That said, the FAB can clearly dampen down the enthusiasm and trust that people have in an IB, which is what the Trump administration did after with FAB 2018-01.”

Epstein emphasized the related point that interpretive bulletins (or any regulation for that matter) can never really supersede the law upon which they are based. So in this case, neither the field assistance bulletin nor the interpretative bulletin impact the deeper requirements of the Employee Retirement Income Security Act (ERISA). As Levine explains, ERISA always requires fiduciaries to act with the care, skill, prudence, and diligence a hypothetical prudent person would use. ERISA requires fiduciaries to act “solely” in the interest of a plan’s participants and beneficiaries and for the “exclusive purpose” of providing benefits and paying reasonable administrative expenses.

“Even so, the most recent ESG guidance continues DOL’s public seesawing on the extent to which plan fiduciaries can take economic benefits created apart from investment return to the plan into account when making investment decisions,” Levine observes. “Each of the last two Democratic administrations took a more neutral stance towards ESG considerations. In contrast, the last two Republican administrations suggested that ESG considerations should more rarely be taken into account.”

More on ESG/proxy voting uncertainty

In a helpful analysis of this issue prepared by Levine and some of his Groom colleagues, it is suggested that one strategy for sorting through seemingly conflicting regulations is to look for what is truly new and novel in the latest guidance. This is likely the real core of what it is that the regulator is hoping to accomplish with any new “bulletin” or “tips” or “guidance.”

So for example, in FAB 2018-01, there is some new language regarding the addition of ESG-themed investment alternatives to a 401(k) plan’s investment lineup. It states that, “a prudently selected, well managed, and properly diversified ESG themed investment alternative could be added to the available investment options on a 401(k) plan platform without requiring the plan to forgo adding other non-ESG-themed investment options to the platform.”

“However, DOL then goes on to discourage the use of ESG themed options as QDIAs,” Levine observes. “Nothing in the QDIA regulation suggests that fiduciaries should choose QDIAs based on collateral public policy goals. In fact, DOL hypothesizes that plan participants could have competing views on collateral benefits and that a fiduciary could thus violate his or her duty of loyalty by favoring some participants’ views over others.”

As Levine and his colleagues explain, FAB 2018-01 also provides new insights on the separate Interpretive Bulletin 2016-01, in which the Obama-directed DOL indicated that proxy voting and shareholder engagement can be consistent with a fiduciary’s obligation under ERISA.

“Here though, the FAB asserts that DOL primarily characterized these activities as permissible because they typically do not involve a significant expenditure of funds,” Levine explains. “Emphasizing that the size of the expenditure is important to determining whether it is permissible under ERISA, DOL states, the IB 2016-01 was not intended to signal that it is appropriate for an individual plan investor to routinely incur significant expenses and to engage in direct negotiations with the board or management of publicly held companies with respect to which the plan is just one of many investors.”

Similarly, according to the Groom attorneys, FAB 2018-01 states that IB 2015-01 was not meant to imply that plan fiduciaries, including appointed investment managers, should routinely incur significant plan expenses to, for example, “fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues relating to such companies.”

Finally, FAB 2018-01 uniquely cautions fiduciaries who believe there are special circumstances that warrant “routine or substantial” shareholder engagement expenditures to document an “analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon.”

“Thus, DOL appears to be signaling that, as a matter of enforcement, it will require additional documentation regarding significant expenditures of plan assets for shareholder proxy voting activities,” Levine says.

The role of Congress

It’s not just the DOL or the IRS that has a hand in creating regulatory uncertainty. Congress has played its own part, and continues to do so, for example in the way it intervened in 2017 to undue Obama-era DOL regulations that sought to expand the ability of states to create ERISA-exempt defined contribution plans to cover private-sector workers.

The rules, adopted in 2016, were designed to assist states that had already enacted laws requiring employers that do not offer workplace savings arrangements to automatically enroll their employees in payroll deduction individual retirement accounts (IRAs) administered by the states. It also applied to states that had enacted laws creating a marketplace of retirement savings options geared at employers that do not offer workplace plans. At that time, nearly a dozen states had enacted these kinds of laws. Other states said they were considering similar measures, but felt hindered by uncertainty regarding the application of ERISA’s preemption provisions.

Responding to this uncertainty, the Obama-directed DOL provided some full-fledged rulemaking to provide a safe harbor from ERISA coverage, and to reduce the risk of ERISA preemption litigation. The rulemaking also ensured workers had the choice to opt-out of auto-enrollment arrangements.

But in the spring and summer of 2017, a bill advanced through Congress and earned president Trump’s signature to entirely undo the safe harbor and revoke the Obama-era rulemaking. At the time, many retirement industry advocates voiced exasperation at the move, wondering what would become of the plans that had already been created in many states, but some industry groups were pleased based on their concern that the DOL rules would have meant individuals in these state-run plans would not get the same protections as those in employer-sponsored plans.

If that weren’t confusing enough, commentary has also emerged that the law passed by a Republican president and Congress might actually have missed its mark entirely. The argument goes as follows. Originally, the states had planned to use individual retirement account type plans so as not to be subject to ERISA before the new fiduciary rule came into play. Then, through the fiduciary rule, the DOL was pushing hard to have all IRA products subjected to ERISA. Against this backdrop, the states had reiterated their need to be exempt from ERISA—hence the request from their new programs to be expressly exempt. The DOL, still under Obama, in turn issued an exemption for these state-based programs to be free from ERISA standards.

But after the current administration killed the fiduciary rule, this actually removed the states’ original concern about their IRA programs’ exposure to ERISA. Of course, removing the tougher fiduciary standard could be bad for the average investor who would have benefited from the tighter controls it would have forced on product providers. With the abolishing of the fiduciary rule, the whole matter in a way becomes a moot point, since the IRA plans will not be subject to ERISA. Hence, the industry is back to square one, where the states can offer IRAs that were never going to be subject to ERISA in the first place if it were not for the fiduciary rule.