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In this Current Outlook we review DOL’s 60-day delay of the applicability of its Fiduciary Rule, Congressional Review Act legislation voiding the Obama DOL’s “path forward” for state-mandated private sector retirement programs and the recent decision for plaintiffs in Bell v. Anthem.
On April 7, 2017, the Department of Labor delayed the applicability date of its 2016 Fiduciary Rule for 60 days, until June 9, 2017. But for the delay, the rule would have been applicable on April 10, 2017. DOL also delayed compliance with certain requirements of the exemptions that were part of its “regulation package” (including, e.g., the Best Interest Contract (BIC) Exemption) until January 1, 2018. Until that date, “fiduciaries relying on these exemptions for covered transactions [are required to] adhere only to the Impartial Conduct Standards (including the “best interest” standard), as conditions of the exemptions.”
Summarizing the effect of the delay rules, DOL stated:
Beginning on June 9, 2017, advisers will be subject to the prohibited transaction rules and will generally be required to (1) make recommendations that are in their client’s best interest (i.e., IRA recommendations that are prudent and loyal), (2) avoid misleading statements, and (3) charge no more than reasonable compensation for their services.
This delay by DOL is in response to an Executive Memorandum from President Trump directing DOL to “examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” In the preamble to the rule implementing the delay, DOL stated that, “any such review is likely to take more time to complete than a 60-day extension would afford” but that it “will aim to complete its review of the Fiduciary Rule and PTEs pursuant to the President’s Memorandum in advance of January 1, 2018.”
DOL’s approach seems to presume that the 2016 rule’s sweeping redefinition of “fiduciary” – e.g., triggering adviser-status when any recommendation is made, including recommendations to IRA holders and including recommendations with respect to distributions (and not just investments) – will not be affected by the review ordered by the Executive Memorandum and that the Impartial Conduct Standards described in the related exemptions will remain in effect. In support of this approach, DOL stated that, “the Fiduciary Rule and the Impartial Conduct Standards are among the least controversial aspects of the rulemaking project.”
Suffice it to say that, in this regard, not everyone agrees with DOL. Indeed, the Trump Administration (via Press Secretary Sean Spicer) stated:
The rule is a solution in search of a problem. … The Department of Labor exceeded its authority with this rule and this is exactly the kind of government regulatory overreach the President was put in office to stop.
There are, at this point, no Trump-appointed policy officials at DOL. Thus, DOL’s action with respect to the delay may be thought of as reflecting the policy views of the Obama DOL.
For the moment, probably the best course is to view DOL’s action as a simple 60-day delay. Whether there will be more delays, or whether, as this “pre-Trump” DOL assumes, the Fiduciary Rule and the Impartial Conduct Standards will not be revised, will depend on the attitude of a Trump-appointed Secretary of Labor, and, just as critically, a new head of the Employee Benefit Security Administration. Once those officials are in place, we will get a better idea of how committed the new Administration is to revising the Fiduciary Rule and just what the scope of that revision will be.
In that regard, we note that on March 30, 2017, the Senate Health, Education, Labor and Pensions Committee voted (on party lines) to approve the appointment of President Trump’s Labor Secretary nominee, Alexander Acosta. His nomination will now be taken up by the Senate.
A number of states are considering implementing programs that would require employers that do not offer a retirement plan to adopt an auto-IRA – a payroll deduction IRA into which all employees would be defaulted, subject to an opt-out right. To date, all these state programs have conditioned implementation on an assurance (of one sort or another) that the program is not a retirement plan covered by ERISA. (For more information on state auto-IRA programs generally, see our article Update on state plans – 2016.)
In August 2016, DOL adopted a regulation (intended to provide that assurance), holding that, if certain criteria are met, a state mandatory private sector auto-IRA program would not be an ERISA plan. In December 2016 DOL extended that relief to certain cities (and certain other state subdivisions).
On March 30, 2017, the Senate approved (by a 50-49 vote) House Joint Resolution 67, Congressional Review Act legislation that would, in effect, void DOL’s December 2016 regulation covering cities. After the Easter Recess, the Senate is expected to take up H. J. Res. 66, which would void the August 2016 regulation covering states. Both CRA resolutions have already been approved by the House.
On March 13, 2017, the Trump Administration issued a “Statement of Executive Policy” announcing its intent to sign these resolutions when and if they are adopted by Congress.
Thus, it appears likely that the Obama Administration action providing a “path forward” for state-mandated private sector retirement programs will be reversed. Whether states will continue to pursue this project and on what legal theory is (at this point) unclear.
The 2016 401(k) plan fee complaint filed in Bell v. Anthem pushed the limits of the ERISA prudence standard for the selection of funds for inclusion in a 401(k) plan fund menu.
In Anthem, plaintiffs alleged (among other things) that plan fiduciaries breached their duty of prudence when they selected an index fund with an expense ratio of 4 basis points when an “identical” fund was available (from the same fund company) that only charged 2 basis points. Further, plaintiffs alleged that plan fiduciaries violated ERISA’s prudence standard by not using “less expensive” separate accounts and collective trusts, citing the DOL for the proposition that “separate accounts … can ‘commonly’ reduce ‘[t]otal investment management expenses’ by ‘one-fourth of the expenses incurred through retail mutual funds.’” (See our article Sponsor sued for not selecting lower-fee collective trusts or separate accounts for detailed discussions of the Anthem complaint.)
On March 23, 2017, the United States District Court Southern District of Indiana denied defendant-fiduciaries’ motion to dismiss on these issues. In support of their motion to dismiss, defendants asserted that the Seventh Circuit’s decision in Hecker v. Deere stands for the proposition “that a fiduciary’s duty is limited to offering choices across the fee spectrum to participants and that duty does not require Defendants to achieve cost optimization.”
In finding for plaintiffs, the court found that “Defendants’ reliance on [Deere] is misplaced. In [Deere], plaintiffs generally asserted that defendants violated their fiduciary duty by not offering certain investment options and selecting investment options with excessive fees.” The Deere court did not address “whether a defendant violates their fiduciary duty in selecting high-cost investment options where identical investment options are available at a lower-cost.” (Emphasis in the original.)
Courts are currently considering a number of 401(k) plan fee cases in which, in effect, plaintiffs are claiming that plan fiduciaries did not get the “best deal” for plan participants. Defendants are (often) arguing that ERISA’s prudence standard only requires that they get a “good deal,” frequently citing (as they did in Anthem) language from the Deere court that “nothing in ERISA requires every fiduciary to scour the market to find and offer the cheapest possible fund (which might, of course, be plagued by other problems).”
In this regard, plaintiffs may (as they did in Anthem) cite Tibble v. Edison, in which the United States District Court for the Central District of California found that the use of a retail share class where a lower-cost institutional share class was (or may have been) available violated ERISA prudence standards.
What exactly is the prudence standard for the inclusion of a fund in a 401(k) plan fund menu – “good” or “best” – is currently being fought out in the courts, in the Anthem case and in other cases, e.g.,White v. Chevron. In Anthem plaintiffs won the first round. In Chevron – where similar arguments were made – they lost.
We will have to wait for further proceedings – at a minimum, consideration of these district court cases by Courts of Appeal – to get clear guidance on this issue.
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We will continue to follow these issues.