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In this article we conclude our review of DOL’s recent PEP guidance, briefly discussing issues raised in DOL’s request for information (RFI). DOL describes its RFI as “primarily for the purpose of considering whether additional guidance to facilitate small employers joining PEPs would be helpful.”
Below we highlight issues DOL is focusing on in the RFI with respect to “Conflicts of Interest and Mitigation” and “Safe Harbor Considerations” – both of which go to fiduciary liability:
To repeat what we said (at more length) in our prior article, in all of its PEP guidance (including the RFI), DOL consistently hits three themes:
PEPs as a way of providing economies of scale to small employers.
Encouraging use of PEPs by developing options for limiting small employer fiduciary exposure/liability.
Reducing litigation overall by developing clarifying regulations/guidance and by developing safe harbors.
Conflicts of Interest and Mitigation
DOL wants to know:
How are pooled plan providers allocating fiduciary liability for plan investments? Critically, are they allocating it to participating employers or to a fiduciary picked by the provider.
We discuss these two alternative approaches to allocating fiduciary liability in our first article in this series.
Whether and how are 3(38) independent investment managers being used? Do 3(38) independent investment managers provide services, other than investment management services, to the PEP?
As DOL noted, where the pooled plan provider designates an independent 3(38) investment manager, the employer is (generally) relieved of fiduciary responsibility for PEP investments.
Do pooled plan providers limit investment choice, and in that regard “[a]re PEPs offering investments that are proprietary to the pooled plan provider, its affiliates, or any other PEP service provider?”
While not “illegal” (as such), the issues raised by a provider’s limiting employer choice with respect to the fund menu to proprietary funds have been a focus of DOL regulatory concern for some time.
Do PEP investments include revenue sharing arrangements offsetting administrative (e.g., recordkeeping) costs?
Again, revenue sharing arrangements are not prohibited by ERISA, but they have been a target (particularly) of litigation.
“How do pooled plan providers manage potential conflicts of interest in cases in which they offer investments in which they have a financial interest? … Are there any potential conflicts of interest in PEP distribution models? If so, how are they managed?” And, where necessary, what prohibited transaction exemptions are pooled plan providers relying on? Are there additional prohibited transaction exemptions needed? We expect these conflict of interest issues to get ongoing regulatory attention as PEPs develop.
Conflicts of interest has been the underlying concern animating DOL’s years-long effort to regulate investment advice.
Possible safe harbors
The following questions from DOL give us a feel for the sort of safe harbor(s) it is considering:
Is an employer safe harbor necessary? As a threshold matter, should DOL adopt any safe harbor “for small employers to satisfy their fiduciary responsibilities for selection and monitoring pooled plan providers and other named fiduciaries … and their fiduciary responsibilities for the investment and management of the portion of the PEP’s assets attributable to their employees …?”
How should the employer safe harbor be framed?
Should it require the PEP to use an independent 3(38) investment manager or exclude PEPs that “offer investments in which the pooled plan provider has a financial interest?”
Should the safe harbor specify investments (e.g., require a TDF)? Should it specify a permitted range of fees?
Should there be a pooled plan provider safe harbor? In addition to a safe harbor for employers, is there a need for a safe harbor for pooled plan providers “to encourage the formation of high-quality PEPs?” Which sorts of providers and which business models (e.g., bundled or unbundled) would need such a safe harbor?
Safe harbors – as a protection against litigation – seem to be a key theme of Trump Administration ERISA policy – the recent Executive Order on "Democratizing Access to Alternative Assets for 401(k) Investors” also instructed DOL to consider “appropriately calibrated safe harbors” with respect to the use of alternatives in certain DC investments.
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We will continue to follow this issue.