November 10, 2014
ERISA Advisory Council Releases Final Recommendations; EBSA Provides Regulatory Update
On November 4, the ERISA Advisory Council (EAC) approved and presented its final recommendations to U.S. Secretary of Labor Thomas Perez and Assistant Secretary Phyllis Borzi of the Employee Benefits Security Administration (EBSA). Prior to the EAC’s recommendations, Borzi gave a brief update on EBSA’s regulatory agenda.
The EAC is a group of benefits experts established under the Employee Retirement Income Security Administration (ERISA) to identify emerging benefits issues and advise the Secretary of Labor on health and retirement policy. The final recommendations were based on hearings held in June (as reported in the June 20 Benefits Byte) and August (as reported in the August 27 Benefits Byte). As we reported in the October 7 Benefits Byte, the panel released draft recommendations on September 29.
Assistant Secretary Borzi provided the following updates to EBSA’s regulatory agenda:
- Brokerage Windows: The DOL will review responses from the August 20 request for information (RFI) (as reported in the August 21 Benefits Byte) and will not decide on any future regulatory action on to brokerage windows before finishing reviewing. Responses to the RFI are due on November 19.
- Conflict of Interest (“Fiduciary Definition”) Rule: The DOL is currently working on a new proposed rule with the goal of re-proposing it in January 2015.EBSA originally issued proposed regulations in October 2010 that would have greatly expanded the definition of a fiduciary (see the October 21, 2010, Benefits Byte). However, in the face of bipartisan congressional criticism and concerns expressed by the Council and other plan sponsor groups, DOL withdrew the regulations. The SEC currently has a related long-term project underway.
- Limited Wraparound Coverage as an Excepted Benefit: The DOL is drafting final regulations for wraparound coverage as an excepted benefit under the Patient Protection and Affordable Care Act (PPACA). There is not a specific timetable for the release of the regulation, but if the final regulation contains significant changes from the proposed regulations issued in 2013, the DOL will re-propose the regulation. The Council filed written comments in February on the proposal.
- Proposed Rule for E-Filing of Notices: The DOL proposed a rule on September 30 that would require electronic filing of top hat plan statements and apprenticeship and training plan notices (as reported in the September 29 Benefits Byte). Comments are due on December 29.
Facilitating Lifetime Plan Participation
The EAC studied the factors leading participants to leave their assets in or move them out of an employer-sponsored retirement plan. The EAC made the following recommendations with regard to facilitating lifetime plan participation:
- Provide education and outreach to participants and plan sponsors and develop a model notice for participants. Suggested measures include providing sample educational materials that can be used by plan sponsors and development of a “plain English” model notice that can be provided to participants prior to enrollment and throughout employment, to help them decide what to do with retirement assets particularly at job change and retirement or other distribution events.
- Provide education to plan sponsors relating to plan features that encourage lifetime participation.
- Provide additional guidance to encourage plan sponsors to offer lifetime income options. The EAC recommended the DOL provide additional guidance (including an updated defined contribution plan annuity safe harbor) and explore making certain tools (such as the agency’s Lifetime Income Calculator or My Social Security) more integrated and available.
- To the extent that plan sponsors make loans available to participants, the DOL should encourage them to consider allowing continuation of loan repayments after separation. Borzi said that the DOL may approach recordkeepers to inquire about the cost of establishing a system to better permit loan repayments after separation.
- Allow for technological advances. The EAC recommends that the DOL: (1) create uniform sample forms for improving plan-to-plan transfers (roll-ins and roll-outs), (2) foster technology standards to simplify certain administrative functions and (3) encourage a future EAC to consider the issues related to standardized technology solutions for automatic account aggregation for job changers. These recommendations are based in part on recent efforts in the Australian system.
Outsourcing Employee Benefit Plan Services
The EAC also studied the outsourcing of employee benefit plan services, with a particular focus on the allocation of legal responsibilities and risk for activities of a service provider on behalf of a plan. Allison Klausner, assistant general counsel – benefits for Honeywell International Inc. and a member of the American Benefits Council’s Executive Board, gave testimony on this topic on behalf of the American Benefits Council on June 18.
The EAC gave the following recommendations with respect to outsourced services:
- Educate plan sponsors on current practices for outsourced services. The EAC recommended the DOL provide industry information about the range of outsourcing options and types of providers, specifically with respect to “outsourced [Chief Investment Officer]” arrangements, and provide information on contracting practices, such as termination rights, indemnification, liability caps and service level agreements, which might assist plan sponsors and other fiduciaries in negotiating service agreements. The EAC emphasized that any education offered by the DOL should not be prescriptive in nature.
- Clarify the legal framework under ERISA for delegating responsibility to service providers. The EAC recommended clarification of (1) plan sponsors’ responsibility under ERISA Section 404 where the plan document designates a “named fiduciary” under ERISA Section 402(a) that is not the plan sponsor, and (2) the scope of liability for a fiduciary who appoints a non-fiduciary service provider to perform functions necessary for the operation. The EAC also recommended (3) clarification on administration of the plan and application of the co-fiduciary provisions of ERISA Section 405, including whether the co-fiduciary liability provisions of ERISA Section 405(c)(2)(B) impose additional obligations of an appointing fiduciary beyond the duty to select and monitor an appointed fiduciary, and if so, the extent of those duties, the standard of knowledge required for co-fiduciary liability under ERISA Section 405(a) and contribution rights among co-fiduciaries. It is important to note that the drafters of this recommendation avoided taking a position about whether delegating the “named fiduciary” function was a fiduciary act.
- Provide additional guidance on the duty to select and monitor service providers.The EAC recommended that the DOL provide guidance through: (1) consolidating prior guidance on a fiduciary’s duty to select and monitor service providers, (2) providing guidance on the frequency and scope of monitoring requirements, (3) identifying “questions to ask” and other best practices in selecting and monitoring service providers, (4) providing guidance on managing potential conflicts of interest in engaging fiduciary service providers and (5) publishing clear examination and enforcement priorities with the publication of relevant examination findings.
- Facilitate the use of Multiple Employer Plans (MEPs) and similar arrangements as a means of encouraging plan formation by relieving plan sponsors of fiduciary obligations and administrative burdens. The EAC recommended the DOL accomplish this by (1) considering the benefits of MEPs and similar arrangements in rulings, regulations and interpretations, (2) considering developing a sample structure for MEPs that will help insure that conflicts of interest, prohibited transactions and true fiduciary independence and disclosures are addressed and (3) developing rules and safe harbors for MEP sponsors and adopting employers that would not expose them to liability from acts of non-compliant adopting employers. The DOL expressed particular interest in this portion of the EAC’s report, specifically plan sponsor concerns about the current “nexus” requirement for multiple employer plans.
The Council has supported the encouragement of MEPs as a way of expanding employer-sponsored coverage. The EAC’s discussion and potential recommendation on MEPs directly correlates with a recommendation made in the Council’s strategic plan, A 2020 Vision: Flexibility and the Future of Employee Benefits, which supports allowing small, unrelated businesses to join MEPs.
- Update and provide additional guidance on insurance coverage and ERISA bonding practices of outsourced service providers. The EAC suggested DOL update fidelity bond regulations and Field Assistance Bulletin 2008-04, and educate plan sponsors on the availability of fiduciary insurance coverage including information on scope of coverage, deductibles, policy limits and ratings of insurers.
Pharmacy Benefit Manager Compensation and Fee Disclosure
The EAC also gave recommendations concerning pharmacy benefit manager (PBM) compensation and fee disclosure, with a focus on whether PBMs should be required to comply with plan fee disclosure regulations under ERISA Section 408(b)(2). The Council reported on the PBM fee disclosure testimony during the August hearings – at which Klausner testified on Honeywell’s behalf – in the August 22 Benefits Byte. The EAC presented the conflicting viewpoints it received about PBM compensation, including testimony from PBM providers that information regarding fees is available to plan sponsors. On this point, Borzi was extremely skeptical, stating that this “hasn’t been [her] experience.” The EAC made the following recommendations:
- Consider making the 408(b)(2) regulations applicable to welfare plan arrangements with PBMs. The EAC noted that the testimony it received, on balance, supported further examination of the matter of PBM compensation. The EAC also concluded that the PBM’s concerns about anti-competitive behavior and the release of proprietary information could be addressed through confidentiality agreements.
- DOL should issue guidance to assist plan sponsors in determining whether to and how to conduct a PBM audit of direct and indirect compensation. Many plan sponsors told the EAC that such audits are necessary to help them meet their fiduciary duties. However, while such audits are believed to be needed because they allow fiduciaries to confirm that PBMs are paid in accordance with the terms of the service contract, many plan sponsors have difficulty in obtaining the information they need to appropriately and efficiently conduct the audit. The EAC expressed the belief that DOL guidance will help clarify both the need for such audits and the plan fiduciaries’ and PBMs’ responsibilities in the conduct of such audits.
This concludes the EAC’s activity for this term. New representatives and topics will be announced in Spring 2015.
For more information on the two retirement issues, contact Jan Jacobson, senior counsel, retirement policy, or on the PBM fee disclosure issue, contact Kathryn Wilber, senior counsel, health policy. Both can be reached at (202) 289-6700.