In this article we review possible retirement policy agency initiatives of a Biden Administration. We will follow up with a discussion of possible legislative initiatives when the Congressional situation becomes clearer.
ESG and proxy guidance
At the end of October, the Department of Labor finalized its ESG regulation, addressing consideration of environmental, social, and corporate governance (ESG) factors in retirement plan investments under ERISA’s general fiduciary rules.
While “softer” than the proposal, the final rule retained most of its basic elements: a requirement that fiduciaries focus only on “pecuniary factors” in making investment decisions; a “stricter” application of the “tie-breaker” rule; and a higher standard for the inclusion of ESG funds in a QDIA.
Many Democrats were very critical of DOL’s original proposal and less than satisfied with the final rule.
The critical issue, for providers and sponsors who wish to continue current ESG investment policies, will be whether those policies can be made to fit within the new rule’s regulatory scheme. It may be possible that that can be accomplished by sub-regulatory guidance (e.g., an advisory opinion) that provides a generous interpretation/application of the new rule, without going through formal notice-and-comment amendment of the regulation. Or a Biden Administration, like every new Administration since President Clinton’s, may believe it is necessary to revisit this guidance.
Similar issues are presented by DOL’s yet-to-be-finalized proposed regulation revising DOL’s rules for the voting (or not voting) of proxies by ERISA plan fiduciaries.
Fiduciary advice PTE
On June 29, 2020, DOL released a proposed class Prohibited Transaction Exemption that would allow “investment advice fiduciaries … to receive compensation, including as a result of advice to roll over assets from a Plan to an IRA … that would otherwise violate the prohibited transaction provisions of ERISA and the Code.” The proposed PTE would retain the 1975 “five-part test” for who is an “investment advice fiduciary” but includes an extensive “interpretation” (or re-interpretation) of that test that in many respects broadens it beyond prior law and practice and articulates principles for its application to plan-to-IRA rollovers.
The proposed PTE would condition relief on the fiduciary providing advice in accordance with “Impartial Conduct Standards” and requires that affected financial institutions and investment professionals acknowledge their fiduciary status and describe (in writing) the services they offer and material conflicts of interest. Affected financial institutions must “adopt policies and procedures prudently designed to ensure compliance” with these requirements and conduct a “retrospective review” of compliance that is “reduced to a written report.” Enforcement of violations of these rules would be under ERISA’s and the Internal Revenue Code’s fiduciary and prohibited transaction provisions.
There was significant criticism of this proposal from opponents of tougher regulation of investment “advice.” And as we understand it, under pressure from the White House, DOL is preparing to step back (somewhat) from its (arguably radical) reinterpretation of the five-part test included in the proposal’s preamble.
On the other hand, there was also significant criticism, particularly from Congressional Democrats and participant advocates, to the effect that the proposal did not go far enough in regulating investment advice.
It’s possible that the Trump DOL will try to finalize the proposal in the next two months. If it does not – and certainly even within the DOL there seem to be differences of opinion on this issue – then we would expect a second look at (1) the current state of fiduciary advice guidance generally, (2) the extent to which the Fifth Circuit decision vacating the Obama DOL’s fiduciary advice regulation limits its ability to adopt stricter fiduciary advice rules (or even, conceivably, revive the Obama Administration rule in some version), and (3) whether a prohibited transaction exemption (as opposed to, e.g., a new regulation project) is the right vehicle for further guidance on this issue.
How aggressive a Biden DOL will be on this issue may very much depend on who is the new Secretary of Labor and who is the new Assistance Secretary of DOL’s Employee Benefit Security Administration and how much they are committed to aggressive regulation in this area.
Private equity advisory opinion
On June 3, 2020, DOL issued an information letter with respect to the inclusion of private equity investments in a “designated investment alternative” in a participant directed defined contribution plan (e.g., a 401(k) plan), concluding that, as a general matter, “a plan fiduciary would not … violate [ERISA fiduciary rules] solely because the fiduciary offers a professionally managed asset allocation fund with a private equity component as a designated investment alternative for an ERISA covered individual account plan in the manner described in [the] letter.” DOL noted, however, that private equity investments “present additional considerations to participant-directed individual account plans that are different than those involved in defined benefit plans,” and there are special fiduciary considerations in the participant-directed DC plan context.
Some Congressional Democrats and participant advocates criticized this letter, arguing that the problems associated with private equity investments, including high fees and lack of transparency, made them an inappropriate 401(k) investment.
There is copious language in DOL’s information letter identifying the issues/risks that 401(k) private equity investments present. If a Biden DOL wishes to discourage this strategy, it may consider a “clarifying” letter that (more or less) emphasizes those points in the original letter. And/or it may consider an enforcement project targeting them.
We note that there is a major case – Sulyma v. Intel – involving fiduciary claims with respect to (among other things) 401(k) private equity investments.
State plan initiatives
In August 2016, DOL finalized its regulation providing a “path forward” for state private retirement program initiatives. The rule would have allowed employers to provide an auto-enrollment IRA for their employees without triggering ERISA coverage, provided the auto-IRA is implemented pursuant to a state mandate. In 2017, with Republicans in control of the White House and Congress, this regulation was voided by Congressional Review Act legislation.
A lawsuit has been brought claiming that the California state program is preempted by ERISA. (Howard Jarvis Taxpayers Association v. The California Secure Choice Retirement Savings Program.) Plaintiffs lost at the lower court level; the case is currently on appeal to the Ninth Circuit. The Trump DOL has filed an amicus brief in that case, supporting plaintiffs and arguing that under its regulations and ERISA the California program is preempted.
We would expect a Biden DOL to do something to reverse current DOL policy opposing these programs. What form that might take – an amended amicus brief? a new regulation? sub-regulatory guidance? – is at this point anybody’s guess.
It is also possible that Democrats in Congress will push for a federal auto-IRA or retirement plan “mandate,” e.g., along the lines of the one proposed by House Ways and Means Committee Chairman Neal (D-MA).
The Setting Every Community Up for Retirement Enhancement (SECURE) Act authorized the establishment of defined contribution open multiple employer plans, called “Pooled Employer Plans” (PEPs) that meet certain requirements and that are provided by a “Pooled Plan Provider.” Generally, a PEP is a plan for (non-union) employees of unrelated employers. In effect, PEPs will be provider-based multiple employer plans in which the participating employers do not have any special relationship with each other or with the provider.
Providers may generally begin marketing PEPs in 2021. DOL recently finalized guidance on (required) PEP registration.
While the Obama DOL was not fundamentally opposed to the provider-based private retirement savings plan system that PEPs represent, it’s fair to say that it had a number of concerns about it and at times seemed to favor a state-based private employer system. In this regard, consider this language from DOL’s Interpretive Bulletin 2015-02:
In the Department’s view, a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state [multiple employer plan] and their employees, such that the state should be considered to act indirectly in the interest of the participating employers. Having this unique nexus distinguishes the state [multiple employer plan] from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers.
Some have expressed concern that PEP regulatory requirements may reduce or eliminate the ease-of-administration advantage that PEP-supporters have touted. The new Administration’s attitude towards PEPs and the implementation of the new PEP system will be a critical issue in 2021.
De-risking – retiree lump sums
In 2019, the (Trump) the Internal Revenue Service issued Notice 2019-18, stating that it no longer intended to amend current required minimum distribution (RMD) regulations to prohibit the payment, as part of a “lump-sum window program,” of a lump-sum to a retiree currently receiving an annuity. This Notice effectively reversed (Obama) IRS guidance (Notice 2015-49) stating that it would issue such a regulation.
The Trump IRS guidance generated significant criticism, both from Congressional Democrats and participant advocates. Some believe, however, that there simply isn’t legal authority in the statute for the change to the regulation the Obama IRS was proposing.
Certainly, a Biden IRS/Treasury will revisit this issue – Democrats and participant advocates have expressed ongoing concerns about lump sum payment programs. Whether they will take any action – or what action they can take other than enhanced communication – is unclear.
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We have not discussed changes to the Pension Benefit Guaranty Corporation premium rules, because any such change would (1) require Congressional approval and (2) likely raise the issue of what to do about the financially distressed multiemployer plan system.
We will continue to follow these issues.