Regulatory and Legal DC Issues for 2013

March 6, 2013 ( - A group of attorneys discussed the regulatory and legal issues defined contribution (DC) plan sponsors should keep in mind for 2013.  

An expanded definition of fiduciary, restrictions on rollover IRAs, 408(b)(2) fee audits, tax reform and retirement readiness are DC retirement plan issues that will dominate discussions in Washington in the coming year. 

“At the core of the new [fiduciary] rule is DOL’s concerns about conflicts of interest in ERISA [Employee Retirement Income Security Act],” said Marcia S. Wagner, managing director of The Wagner Law Group, at the National Association of Plan Advisers/American Society of Pension Professionals and Actuaries (NAPA/ASPPA) 401(k) Summit. “DOL’s first proposal was to eliminate the five-part ERISA test and make even casual advice a fiduciary. This has been scrapped—but DOL still wants to expand the definition. If an adviser would have substantial consideration [over a plan], DOL says, they are a fiduciary.”

Wagner expects that, to avoid being held up to the forthcoming fiduciary standards, which the Department of Labor (DOL) is likely to introduce in June or July, an adviser or service provider will have to expressly “exempt themselves by making a disclaimer.”

One benefit of the new fiduciary rule that industry experts are hoping for is a clearer definition of education versus advice, and the easing of prohibited fiduciary transactions for broker/dealers, said David Levine, a principal with Groom Law Group.  

Fred Reish, a partner in the Employee Benefits & Executive Compensation Practice Group at Drinker, Biddle & Reath, does not expect DOL will “change the definition of fiduciary too much,” although it will render “most all 401(k) advisers fiduciaries. For third-party administrators (TPAs), life will be as usual. Recordkeepers will survive by and large; they have the legal staff to support them. Registered investment advisers (RIA) will want a stronger definition of fiduciary. Broker/dealers and insurance brokers? They will consider it too much.”  

Rather than having to disclose to sponsor and participant clients that they are not a fiduciary, Reish expects “Broker/dealers will create more RIA programs.” Among broker/dealers, “There will also be a levelized compensation,” Reish said.

Rollover IRAs   

DOL is also going to take up the issue of whether an adviser-overseen 401(k) rollover into an individual retirement account (IRA) is a fiduciary act, Levine said. “I think they’ll sweep this in, but it won’t be the end of the world if DOL excludes plain-vanilla IRAs.”  

“Is there a need for this rule?” Reish postulated. “Ninety-five percent of rollovers are well done. But if rolled over to an indexed fixed annuity with an 8% front end load and a trail—no. Advisers need to be able to get someone rolled over to a reasonably priced IRA.”  

By design, rollover IRAs are an ideal solution of retirees or near-retirees, Wagner said. They offer investors a far “larger menu of investment options” than they typically have in their 401(k). “DOL is concerned about gross selling, so if you are a 3(21) [fiduciary], DOL says, you cannot do a rollover. If you are not a fiduciary to a plan, you can—but keep this service independent of the plan.”   

408(b)(2) Audits & Litigation   

Plan advisers need to be ready for the coming onslaught of auditors asking their plan sponsor clients how they review 408(b)(2) fee disclosures, Reish said. Drinker, Biddle & Reath provides its clients a comprehensive “checklist of these disclosures,” he said. “We attend plan committee meetings to present these findings.”  

“The [Securities and Exchange Commission’s] Office of the Chief Accountant is telling auditors to look at 408(b)(2)s,” Wagner said. “Document everything.” The 408(b)(2) benchmarking industry is a “cottage industry,” she admitted. “No service is apples to apples, but you can figure out appropriate fees through RFPs [requests for proposals], asking peers and for detailed explanation of fees from service providers. Prove an intelligent analysis was done.”  

While the 408(b)(2) disclosures put a fair amount of pressure on sponsors, “the focus of lawsuits against defined contribution plans is shifting away from sponsors to service providers—especially over appropriate share classes,” Reish said. Thus, he encourages plan advisers to “educate your plan sponsor clients on share classes. Get this topic into committee meetings, and realize this gets complicated when there is an annuity with 15 share classes.”  

These issues tie into the subject of revenue-sharing, which Reish says “will have to be equalized.” Next up, DOL will ask whether “408(b)(2) disclosure is adequate. If you are a fiduciary and you are getting additional compensation, DOL will scrutinize you,” Reish warned.

Tax Reform   

As Congress tries to balance the budget in 2013, the retirement savings industry is not likely to be exempt from their cuts, simply due to “the magnitude of the issue,” Wagner said. “OMB [the Office of Management and Budget] says the government is losing $360 billion in a five-year period” from the qualified tax breaks allowed in 401(k)s and other defined contribution plans. “Even by Washington standards, that is big money,” she added.  

Without question, “there will be some form of limitation” on qualified plan tax exemptions, Reish said. If the tax breaks turn out to be significant, he counsels retirement plan advisers to offer defined benefit plans to small plans, and non-qualified deferred compensation plans to large plans.   

However, Levine is optimistic that the “limits may be reduced, perhaps, to directing 50% of a participant’s contributions to a Roth 401(k).”  

Retirement Readiness  

“Default investments, auto enroll, target-date funds and glide paths have come sharply into DOL’s crosshairs,” Levine noted. “The problem is, if you offer all of these features, but a participant has only $40,000 saved at retirement—will they blame you?” The key is to ensure that “notices and processes” are thorough and documented, he said.  

Make sure target-date fund due diligence is included in a plan’s investment lineup, Wagner suggested. That means scrutinizing the glide path, whether the underlying funds in this type of fund-of-funds includes proprietary products that would be the most profitable to the portfolio manager, and how the asset allocation is skewed. “DOL wants clarity on glide paths, and, ironically, since this is how they are designed, for target-date funds not to be bought on age alone,” she said.  

“Look at how the market crash in target-date funds affected them in 2008," Wagner noted. "There will be another market crash—so if the onus is going to fall on the advisers, make sure to do your analysis.” Otherwise, she warned, “There will be a tsunami of litigation.”  


Lee Barney