DOL regulatory agenda

On June 11, 2021, the Office of Management and Budget released its Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions (Agenda). The Agenda includes four significant Department of Labor regulatory initiatives, with respect to (1) mandatory annual DC plan lifetime income illustrations, required by the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), (2) fiduciary duties with respect to retirement plan investments based on environmental, social, and corporate governance (ESG) factors and with respect to proxy voting, (3) a revision of the DOL advice fiduciary rule, and (4) implementation of the SECURE Act’s DC “group of plans” combined 5500 provision.

In this article we briefly review, and provide some background on, these projects.

Final Rule Stage: Pension Benefit Statements – Lifetime Income Illustrations

On August 18, 2020, the Department of Labor released an “interim final rule with request for comments” on lifetime income illustrations, as required by the SECURE Act.

The interim final rule requires DC plan sponsors to annually provide participants with both a single and a qualified joint and 100% survivor lifetime income illustration showing the annuity their account balance would “buy” and specifies rules for how that calculation (converting an account balance into lifetime income) is to be made. There has been some criticism of the proposal, particularly the decision not to credit projected earnings on a participant’s account for the period prior to retirement. DOL is, according to the Agenda, targeting finalization of the rule in July 2021.

Proposed rule: Implementing Executive Orders 13990 and 14030 – ESG and proxy regulations

Late last year the Trump DOL adopted two regulations defining fiduciary obligations with respect to plan investments based on ESG factors (“Financial Factors in Selecting Plan Investments”) and with respect to the voting (or not voting) of proxies (“Fiduciary Duties Regarding Proxy Voting and Shareholder Rights”).

In March 2021, DOL announced a non-enforcement policy with respect to these regulations, “until the publication of further guidance.”

Executive Order 13990 Protecting Public Health and the Environment and Restoring Science To Tackle the Climate Crisis (January 20, 2021) generally directs agencies to review existing regulations/guidance promulgated under the Trump Administration that are inconsistent with or present obstacles to “Our Nation[’s] … abiding commitment to empower our workers and communities; promote and protect our public health and the environment; and conserve our national treasures and monuments.“

Executive Order 14030 on Climate-Related Financial Risk (May 20, 2021) specifically targets the two regulations noted above, instructing the Secretary of Labor to “consider publishing, by September 2021, for notice and comment a proposed rule to suspend, revise, or rescind” those regulations.

Per the latter Executive Order, the Agenda targets September 2021 for (re)proposed regulations on these issues.

Proposed rule: Definition of the Term “Fiduciary”

On December 16, 2020, the Department of Labor released a final class Prohibited Transaction Exemption (PTE) with respect to fiduciary advice, allowing “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.”

That PTE, in the preamble, significantly re-interpreted the current (dating back to 1975) 5-part test for when a person giving advice to a participant or a plan fiduciary is an ERISA fiduciary (an “advice fiduciary”). Critically, under that reinterpretation, a person advising a participant about an IRA rollover would (in most cases) be an advice fiduciary. That is a re-reading of the 5-part test that conflicts with the views of most practitioners. It also conflicts with the position taken by DOL in a 2005 Opinion Letter, which the PTE revoked.

DOL’s previous effort to re-write the definition of advice fiduciary, through a formal rulemaking, was vacated by the Fifth Circuit, and the PTE represented an attempt to impose much (but not all) of that vacated rule via a reinterpretation of the old rule, in the preamble to the PTE.

With a new Administration more sympathetic to a re-write of the advice fiduciary rule – nearly all Democrat policymakers objected to the PTE because (they believed) it did not go far enough – DOL is going to take another shot at completely revising the advice fiduciary regulation. Quoting the Agenda:

This rulemaking would amend the regulatory definition of the term fiduciary … to more appropriately define when persons who render investment advice for a fee to employee benefit plans and IRAs are fiduciaries ….  The amendment would take into account practices of investment advisers, and the expectations of plan officials and participants, and IRA owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest.

As we have discussed in the past, this regulatory initiative presents a couple of challenges for plan sponsors: First, it is likely (in many cases) to require a revision of some of their relationships with some of their service providers and impose a new set of fiduciary oversight burdens. And second, there may be situations (depending on how the regulation is drafted) in which employees of a sponsor may become “advice fiduciaries” under a new regualtion.

Proposed rule: Implement SECURE Act “group 5500” provision

Proposed rule: Implement SECURE Act “group 5500” provision

The SECURE Act instructs DOL and Treasury to modify the annual report (Form 5500) rules to allow (subject to certain conditions) a group of DC plans sponsored by unrelated employers to file a single aggregated annual report. To qualify for this treatment, the “group of plans” must (among other things) have the same trustee, the same fiduciaries, the same administrator, and the same plan years beginning on the same date, and must provide the same investments or investment options to participants and beneficiaries.

The Agenda indicates a proposed rulemaking in June 2021. SECURE requires that this new “group of plans” 5500 be implemented by January 1,2022.

Long-term project: revision of form 5500

Long-term project: revision of form 5500

The Agenda also includes a “Long-Term Action” form 5500 item, “Improvement of the Form 5500 Series and Implementing Related Regulations Under [ERISA].” The Agenda describes this project as:

Modernizing the financial and other annual reporting requirements on the Form 5500 [and] making the investment and other information on the Form 5500 more data mineable …. The project is also focused on enhancing the agencies’ ability to collect employee benefit plan data that best meets the needs of changing compliance projects, programs, and activities.

This appears to be a continuation of a project begun in 2016, when DOL, IRS, and PBGC issued a “Proposed Revision of Annual Information Return/Reports.” That proposal generated considerable controversy – two major industry groups wrote the agencies requesting that it be withdrawn. We discussed that proposal in detail in our July 2016 Current Outlook.

As noted, this is a long-term project and inlcudes a (presumably pretty speculative) May 2022 target date for a proposed rulemaking.

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We will continue to follow these issues.