November 5, 2015
- ERISA Advisory Council Releases Recommendations, Borzi Discusses Regulatory Activity
- House Lawmakers Propose ‘Best Interest’ Fiduciary Standard Addition to DOL Rule; Bipartisan Lawmakers Release Legislative Principles
- Treasury Expanding myRA Program to Include New Funding Options
- Employers Can Continue to Call IRS After Recent Reorganization
ERISA Advisory Council Releases Recommendations, Borzi Discusses Regulatory Activity
The ERISA Advisory Council (EAC) released its 2015 recommendations to the U.S. Department of Labor (DOL) on November 4, suggesting that DOL step up its efforts to promote lifetime plan participation and provide additional guidance to employers with regard to pension risk transfers.
The EAC is a group of benefits experts established by Congress and appointed by the U.S. Department of Labor (DOL) to identify emerging benefits issues and advise the Secretary of Labor. In 2015, the EAC examined two topics: (1) “lifetime plan participation” (relating to plan distributions and rollovers) and (2) pension plan “de-risking” (where plan sponsors partially or fully discharge their ERISA plan liabilities), which the EAC has dubbed “pension risk transfer,” and the disclosures given to participants in these events. The EAC has previously addressed both of these topics, examining pension fund de-risking in 2013 and lifetime plan participation in 2014. The 2015 examination focused on notices and disclosure, providing administrative assistance to the DOL.
With regard to lifetime plan participation, the EAC recommended that DOL:
- Publish a range of sample communications that encourage lifetime participation, rather than a uniform model notice.
- Publish “tips and FAQs” to educate plan sponsors about plan design features that encourage lifetime plan participation. (The EAC provided a sample tip sheet for DOL’s consideration.)
- Encourage the creation of “plain language communications” promoting lifetime plan participation that can be tailored and adapted to a plan’s participant population.
- Explore a joint-agency effort with the U.S. Treasury Department to clarify the IRA Rollover Notice under Internal Revenue Code Section 402(f).
- Take further action on the EAC’s 2014 recommendations, which included the provision of guidance on lifetime income options and calculators, technology standards and account consolidation.
In a September 15 letter, the Council provided input and suggestions to the EAC on this topic.
With regard to model notices and disclosures for pension risk transfers, the EAC recommended that DOL:
- Issue model notices as soon as possible and encourage plan sponsors to issue the model notices to participants at the earliest possible stage in the implementation of a risk transfer transaction. (A sample insurance company risk transfer notice and a sample lump sum notice were provided by the EAC.)
- Encourage plan sponsors to refrain from suggesting to plan participants that the applicable mortality tables and discount rates currently permitted to calculate lump sums are “government-approved.”
- Include a link in the lump sum transfer notice to a Web tool that would assist participants in researching the retail annuity that can be purchased with a lump sum.
As we reported in the May 29 Benefits Byte, the Council testified before the ERISA Advisory Council (EAC) on May 28 on the subject of pension plan “de-risking” disclosures.
In conjunction with the release of these recommendations, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA) Phyllis Borzi addressed the EAC.
Borzi revealed that DOL guidance on state-level retirement plan initiatives will be published before the end of 2015, including (1) a proposed regulation that will give states a safe harbor for state-based automatic IRAs that will not trigger ERISA preemption (which, with some exceptions, basically preempts state laws that affect employee benefit plans), and (2) sub-regulatory guidance that will help states offer ERISA-covered state-based plans. Borzi described the safe harbor automatic IRA as a second safe harbor that will take into account automatic enrollment.
Longstanding DOL regulations say that voluntary IRA programs offered by employers, where participation is totally voluntary and employer involvement is minimal, are not ERISA plans, which allow employers to provide their employees with the opportunity to invest in an IRA through payroll deduction without creating an ERISA plan and without triggering ERISA preemption. Borzi said the sub-regulatory guidance on ERISA-covered plans will allow states to serve as service providers or plan sponsors to facilitate coverage. She expressed hope that states will add consumer protections to the state-based automatic IRAs and did not rule out federal legislation to authorize federal automatic IRAs.
Borzi also reported on the controversial proposed regulations that broadly update the definition of “investment advice” by extending fiduciary status to a wider array of advice relationships than is done by the existing rules. (See the April 14 Benefits Byte for a brief summary of the proposal.) Borzi characterized the comment period for the proposal as “extraordinarily long” and said that EBSA has received many comments and suggestions. She added that the DOL plans to finalize the regulations in the first half of next year.
Borzi also talked about DOL Interpretive Bulletin 2015-01, which provided guidance on the selection of “economically targeted investments” (ETIs, also known as “socially responsible” investments) under ERISA’s retirement plan fiduciary standard (See the October 23 Benefits Bytefor more details).
With regard to health care policy, Borzi said the DOL is working on finalizing regulations initially proposed during the first six months after passage of the Affordable Care Act (ACA) and indicated that final regulations would not have significant differences from the proposed versions. She also stated that DOL will propose regulations taking existing ERISA claims regulations and applying them to disability benefits.
Tim Hauser, EBSA’s deputy assistant secretary for program operations, also addressed the EAC on the topic of health care. He indicated that he is particularly worried about fee disclosure in health plans. While retirement benefit fee disclosure is well regulated, health benefits were not included as part of the 2012 final regulations under ERISA Section 408(b)(2).
As we have previously reported, in hearings to discuss the fiduciary rule earlier this year DOL representatives indicated they intend to clarify that the new rule will not apply to health, disability and life insurance contracts that do not include an investment component. However, they were clear that arrangements with an investment component and associated fees would not be excepted.
House Lawmakers Propose ‘Best Interest’ Fiduciary Standard Addition to DOL Rule; Bipartisan Lawmakers Release Legislative Principles
Representatives Mike Kelly (R-PA) and Sam Johnson (R-TX) have introduced the Retirement Choice Protection Act of 2015 (H.R. 3922) to add a “workable ‘best interest’ standard to the U.S. Department of Labor’s (DOL) proposed rule on fiduciary standards. Additionally, a bipartisan group of legislators have unveiled a set of principles for the regulation of investment advisors.
As described in the Council’s April 14 Benefits Byte, the DOL’s proposed regulations that broadly update the definition of “investment advice” by extending fiduciary status to a wider array of advice relationships than is done by the existing rules. The Council has filed numerous comments with EBSA focusing on the impact of the regulations on plan sponsors, noting that the new rules will generate uncertainty, cost and potential liability and force employers to pull back on the educational tools they currently offer to plan participants. Democrats continue to urge DOL to re-open its comment period for further deliberation.
At a September 30 hearing held by the U.S. House of Representatives Ways and Means Committee’s Oversight Subcommittee, numerous witnesses called the proposed rule “flawed” and said that the rule’s existing “best interest” exemption focuses too much on cost to the exclusion of other factors that may be equally or more important to the plan participant. On October 6, Kelly and Johnson, joined by 103 fellow House members, sent a letter to Labor Secretary Thomas Perez expressing concerns that the proposed fiduciary rule “will severely disrupt the availability of affordable financial education and investment advice while also restricting product choice and retirement security for many American families” and to urge the secretary to implement “substantial changes” to fix the rule’s shortcomings.
To address these concerns, H.R. 3922 establishes a new definition for a “best interest recommendation” as “a recommendation provided by a person acting with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person would exercise based on the information obtained through the reasonable diligence of the person regarding factors such as the advice recipient’s age, and any other information that the advice recipient discloses to the person in connection with receiving such recommendation, where the person does not subordinate the interests of the plan or advice recipient, as applicable, to its own.” Under the bill, such recommendations may include those that are based on a limited range of products, providers or offerings and/or those that may result in variable compensation to the person providing the advice.
Kelly and Johnson are both members of the full Ways and Means Committee, which shares jurisdiction over retirement policy with the Education and the Workforce Committee. H.R. 3922 has been referred to both committees for further consideration.
Also in the House of Representatives, a team of bipartisan lawmakers unveiled a list of legislative principles to ensure retirement advisors protect clients’ best interests on November 5 in light of growing concerns about the proposal. The list was prepared by Ways and Means Oversight Subcommittee Chairman Peter Roskam (R-IL), Ways and Means Select Revenue Measures Subcommittee’s ranking Democrat Richard Neal (D-MA), Education and the Workforce Health, Employment, Labor and Pensions Subcommittee Chairman Phil Roe (R-TN) and Rep. Michelle Lujan Grisham (D-NM).
In a statement accompanying the principles, the lawmakers expressed concern that the DOL proposal “may have unintended negative consequences that could harm individuals and families saving for retirement” and announced their intention to introduce a bipartisan legislative solution embodying their principles.
For more information on the fiduciary proposal and possible legislative solutions, contact Diann Howland, vice president, legislative affairs, Jan Jacobson, senior counsel, retirement policy, or Lynn Dudley, senior vice president, global retirement and compensation policy at (202) 289-6700.
Treasury Expanding myRA Program to Include New Funding Options
The myRA program, launched in December 2014, is an executive branch initiative under which savings vehicles (similar to Individual Retirement Accounts (IRAs)) are provided through employers. The program is targeted at individuals who do not already have access to an employer plan, although they can be offered in conjunction with an existing employer plan.
The accounts are invested only in a new class of nonmarketable, electronic Treasury retirement savings bonds that replicate the variable rate of the Government Securities Investment Fund (G Fund) of the Thrift Savings Plan for federal employees.
Until now, myRA accounts were only able be funded by direct deposit through an employer. With the November 4 announcement, participants can now also fund an account by setting up recurring or one-time contributions from a checking or savings account or from a federal tax refund.
As we have previously reported, the U.S. Department of Labor (DOL) has concluded that an employer permitting its employees to contribute to a myRA through payroll deduction does not constitute sponsoring “an employee pension benefit plan” subject to ERISA.
Employers Can Continue to Call IRS After Recent Reorganization
The Council has learned that employer plan sponsors or service providers with technical questions and/or questions about IRS guidance can continue to call the IRS for informal discussions, even now that responsibility for employer plans has been transferred within the agency.
Previously, such questions were addressed to the IRS’s Tax Exempt and Government Entities Division (TE/GE) but now the calls should be made to the IRS Office of Chief Counsel ((202) 317-6700 or (202) 317-4148). As was the case when the questions were addressed to TE/GE, the IRS answers are informal and do not enable the caller to “rely” on the discussion. However, the discussion may provide insights on the IRS’s current thinking on a particular matter.
The change was caused by an IRS reorganization earlier this year (the reorganization was detailed in IRS Announcement 2014-34) when many of the attorney employees who previously worked in the Employee Plans area of TE/GE were transferred to the Office of Chief Counsel. The IRS subsequently announced that the Employee Plans division would no longer provide email responses to technical questions and the Chief Counsel’s office has confirmed they too will not answer questions via email.
IRS guidance prepared prior to 2015 will generally have an Employee Plans (TE/GE) phone number along with a name to contact for questions. The Council understands that many of those contacts are now at the Office of Chief Counsel. Members can call the number listed above and ask for the individual listed in the guidance. If the individual no longer works at the IRS, the Council member can let the IRS know what they are calling about and should be directed to the correct person. Future guidance should have the appropriate phone number.