Fiduciary issues

Retirement Spotlight: Missing Participants – Prevention is the Best Cure

When employers start a retirement plan, they may ask who should be eligible to participate, what kind of contributions should be made, and how and when can employees access their account balances? Unfortunately, many employers don’t consider how to handle missing participants’ account balances—or more importantly—how to prevent losing track of participants in the first place.

The DOL did provide guidance for locating missing participants in 2014 with the issuance of Field Assistance Bulletin (FAB) 2014-01. Although FAB 2014-01 is helpful, it deals mainly with terminated defined contribution plans.

In January 2021, the DOL released three pieces of new guidance: Missing Participants – Best Practices for Pension Plans, Compliance Assistance Release No. 2021-01, and FAB 2021-01. The first piece in this package gives practical guidance on concerns to watch out for and actions to consider. The second piece sheds some light on the DOL investigative process for defined benefit plans. And the third piece gives temporary enforcement relief for terminating defined contribution plans that transfer missing participant benefits to the PBGC. This article will focus on the main points of this guidance and the steps that a plan fiduciary (typically the employer) can take to address concerns related to missing and unresponsive participants.

Tips for Reducing Missing Participant Issues

The DOL’s Missing Participants – Best Practices for Pension Plans identifies practical steps that plan fiduciaries can take to resolve problems created by missing participants. Plan fiduciaries should determine which reasonable, cost-effective practices will yield the best results considering the circumstances—such as the amount of accrued benefits and the cost of various search methods.

  • Maintain accurate census information. Although plan fiduciaries may obtain accurate contact information for new employees, there may be little follow-up afterwards. This often leads to inaccurate contact information, which makes it harder to distribute plan assets once the participant incurs a distributable event. The DOL lists several steps that fiduciaries can take to help ensure that participants’ information is up-to-date.
    • Periodically contact current participants, retired participants, and beneficiaries to verify that the correct contact information is on file. This information may include individuals’ home and business phone numbers and addresses, social media contact information, and emergency contact information.
    • Provide a contact information change request form when sending out other plan communications. Use these communications to encourage participants to notify the plan fiduciary when there is a change in contact information.
    • Offer a secure online portal that participants can use to update their contact information. In addition to offering an online portal, have messages or prompts appear when individuals log into the plan’s website. These messages or prompts should be linked to the online portal and should ask participants and beneficiaries to verify their contact information.
    • Identify uncashed checks and undeliverable mail or email. Once these items are identified, consider how to address and prevent these occurrences in the future.
    • During a merger, acquisition, or the hiring of a new record keeper, ensure that relevant employment records are provided to appropriate parties.

In addition to taking these steps, plan fiduciaries should also continually monitor census information and promptly correct any errors.

  • Create good communication procedures. The DOL suggests that plan fiduciaries take the following steps to ensure that participants are fully informed of their rights and benefits under the plan.
    • When sending correspondence to participants, include the plan sponsor’s name within the communication, and if delivered by mail, on the envelope that it’s delivered in. Clearly state why the participant is receiving the information. Plan fiduciaries should also ensure that their non-English-speaking participants get help in interpreting the correspondence.
    • Provide specific communications to new employees and to participants who are retiring or leaving the company. These communications should stress the importance of providing correct contact information. For example, the communications should explain that this information helps determine when participants can receive their benefits and what amount they’re eligible to receive.
    • Inform participants about their options to consolidate accounts from other employer plans and IRAs.
    • Make it easy for participants to ask questions about their plan benefits by explaining how to access the plan sponsor’s toll-free phone number and website.
  • Use reliable, extensive search methods. Sometimes, despite having good communication and audit procedures in place, plan fiduciaries lose track of their participants. When this happens, plan fiduciaries need to demonstrate that they’ve regularly taken sufficient measures to locate the missing individual, including these DOL-approved search methods.
    • Search all employer records (e.g., payroll records or group health plan records) for more accurate contact information, including email addresses, phone numbers, and social media.
    • Ask the participant’s beneficiaries, emergency contacts, or former colleagues for updated contact information.
    • Try to locate the participant through free online search engines, public databases, social media, commercial locator services, certified mail, or private delivery services.
    • Add participants to pension registries, such as the National Registry of Unclaimed Retirement Benefits, and publicize the registries (e.g., through email or newsletters) to current and former employees and union members.
  • Document steps taken to locate missing individuals. To help with compliance, plan fiduciaries should adopt clear, concise policies—and follow them. And they should document everything they do to locate the missing participant. For example, fiduciaries may develop a checklist of search methods that captures the result of each attempt to find a participant. Plan fiduciaries that use third-party administrators (TPAs) should identify and remedy any communication or recordkeeping concerns and should ensure that the TPA is performing all services that it has agreed to perform.

The DOL emphasizes that, when missing participants’ assets are forfeited under the terms of the plan, plan fiduciaries must still keep records of these participants’ accounts in order to distribute their benefits when due.

Issues the DOL Looks for During an Investigation

Several years ago, the DOL’s Employee Benefits Security Administration’s Regional Offices started a compliance initiative called the “Terminated Vested Participants Project (TVPP).” While this project is aimed at identifying defined benefit plan compliance problems, the DOL may look for similar problems in defined contribution plans. Similar fiduciary obligations apply regardless of the plan type. The Compliance Assistance Release No. 2021-01 (the second piece of the DOL’s guidance package) explains which types of noncompliance may cause the DOL to investigate a defined benefit plan. The DOL also explains that this guidance will help ensure a consistent investigative process for TVPP audits. For example, the DOL considers certain problems (such as missing or incorrect data, undeliverable mail, or uncashed benefit checks) “red flags” that could hint at more serious systemic failures. This guidance may help plan fiduciaries develop a checklist to formalize procedures that help keep track of participants.

  • Reasons for defined benefit plan investigations. The DOL may investigate a plan that appears to have systemic administration problems—especially those related to plan distributions and terminated participants’ vested benefits. Such problems increase with business bankruptcies or with mergers or acquisitions that result in the loss of participant data.
  • Information the DOL may ask for during an investigation. Once a defined benefit plan investigation starts, the DOL will typically seek documents that
    • relate to the plan’s distribution requirements;
    • contain demographic and participant information, such as actuarial reports, participants’ contact information, and employment status; and
    • describe communication and locating procedures: specifically, how the plan fiduciary communicates to individuals who are entitled to benefits and how internal policies dictate the steps taken to locate missing or unresponsive terminated participants.
  • Errors the DOL looks for during an investigation. Inadequate procedures, especially those used to identify and contact missing participants and their beneficiaries, will likely be on the DOL’s radar. For example, when reviewing plan communications, the DOL may examine whether the fiduciary repeatedly sends communications to a known “bad address” without seeking the correct address. Incomplete census data, including the use of placeholders (such as 01/01/1900 birth dates or “John Doe participants”) may also indicate procedural deficiencies.

Once the DOL completes the investigation, it will work with the plan fiduciary to correct any identified issues.

Don’t Forget About the PBGC

DOL regulations provide a safe harbor both to plan fiduciaries of terminating defined contribution plans and to qualified termination administrators (QTAs) of abandoned plans. This safe harbor generally permits plan fiduciaries and QTAs to roll over missing participants’ and beneficiaries’ assets to an IRA. And in certain cases, the assets can be placed in a federally insured bank account or a state’s unclaimed property fund.

In December 2017, the Pension Benefit Guaranty Corporation (PBGC) created a new program for terminating defined contribution plans. This program allows fiduciaries of terminating defined contribution plans to transfer missing participants’ and beneficiaries’ assets to the PBGC. This option helps plan fiduciaries complete the termination process—while making the plan assets accessible to missing individuals.

The DOL envisions expanding the safe harbor to include the transfer of missing individuals’ assets to the PBGC. FAB 2021-01 (the third piece of the DOL’s guidance package) states that, pending the expansion of the safe harbor, the DOL will not penalize plan fiduciaries of terminating defined contribution plans or QTAs of abandoned plans if they transfer plan assets to the PBGC. This temporary DOL policy provides another option when handling abandoned assets. Before transferring plan assets, however, the plan fiduciary or QTA must take all necessary steps to identify and locate the missing individual.

The DOL released FAB 2021-01 in part because it believes that the coronavirus pandemic may make it harder for plan fiduciaries and QTAs to stay in contact with former employees and their beneficiaries. Transferring assets to the PBGC could be a reasonable alternative to moving plan assets to an IRA, transferring the assets to a federally insured bank account, or escheating the account to the state.

The Takeaway

Plan fiduciaries should develop, document, and regularly review procedures that integrate best practices relative to missing participants. Taking decisive steps now may help prevent problems later—and may ensure that plan participants and their beneficiaries receive their proper benefits.

As always, visit ascensus.com for the latest news and information.

 

Click here for a printable version of this issue of the Retirement Spotlight.


Washington Pulse: DOL Releases Final PTE on Investment Advice

The Department of Labor (DOL) has released Prohibited Transaction Exemption (PTE) 2020-02, which addresses how a financial organization or financial professional can receive certain compensation that would otherwise violate the prohibited transaction rules. This DOL class exemption and interpretation—entitled Improving Investment Advice for Workers & Retirees, is important for those who provide investment services to retirement plan participants, IRA owners, retirement plan and IRA beneficiaries, and plan fiduciaries. The PTE becomes effective on February 16, 2021, and outlines the factors that determine whether financial professionals are considered fiduciaries—while giving clear guidance about how fiduciaries must comply with their responsibilities.

In July 2020, the DOL released the proposed investment advice PTE. At that time, Ascensus published a Washington Pulse, which detailed the provisions of the proposed guidance. Because the final PTE is similar to the proposed PTE, this article will focus on the final PTE’s modified guidance and its practical implications.

Background

Guidance on investment advice creating fiduciary duties has evolved throughout the years.

  • Giving investment advice may create a fiduciary duty. Fiduciary duty—a legal concept with important implications for retirement plans—requires certain people to act with the utmost care when they serve in a particular role. While this duty may apply in numerous situations, it is especially relevant in retirement plans when one person owes this special duty of care to another. For example, this includes an employee benefit plan administrator, who must, among other things, administer the plan in the participants’ sole interest. The Employee Retirement Income Security Act of 1974 (ERISA) addresses some specific roles that give rise to this fiduciary duty. ERISA Section 3(21)(A)(ii) specifically lists someone who “renders investment advice for a fee” regarding plan assets as a fiduciary. (Internal Revenue Code Section 4975(e)(3)(B) contains a parallel definition of “fiduciary.”)
  • Guidance on investment advice has shifted. Over the years, the DOL and other regulatory entities have issued guidance on what constitutes investment advice. They have tried to strike a balance between protecting participants’ retirement assets while avoiding overly burdensome rules that could limit participants’ access to meaningful investment counseling. We now have a complex array of rules that dictate when financial professionals are providing investment advice—and that govern when they are bound by a duty to act in the best interests of those they serve. Even as this “final” PTE is being implemented, the new administration has indicated that proposed regulations (and other pronouncements that have not yet gone into effect) may be suspended pending further review. Although we do not know whether (or to what extent) the DOL or other departments may add to or modify investment advice guidance, understanding the latest guidance is still important.

The DOL Makes Four Changes in the Final PTE

The DOL received more than 100 written comments in response to last summer’s proposed PTE. Although the final PTE “retains the proposal’s broad protective framework,” it makes four important changes.

  • The disclosure requirements have been changed. The final PTE now requires financial organizations to document the reason that a rollover recommendation is in the retirement investor’s best interest—and they must provide this documentation to the investor before the rollover transaction. This differs from the approach in the proposed PTE. The proposed PTE did not require that financial organizations provide this rollover documentation to retirement investors before engaging in the rollover transaction. Rather, they were required to make this documentation available to a potentially broad range of parties.
  • Recordkeeping requirements have been narrowed. The broad access allowed to a financial organization’s compliance records generated concern. The proposed PTE permitted access by any
  • authorized employee of the DOL;
  • plan fiduciary that engaged in an investment transaction under the PTE;
  • contributing employer and any employee organization whose members were covered by a plan that engaged in such a transaction; or
  • participant or beneficiary of a plan, or IRA owner that engaged in such a transaction.

Several commenters objected that allowing such broad access to records would create a significant burden on financial organizations. This access might encourage information requests for use in litigation, which in turn might lead financial organizations to avoid addressing compliance concerns for fear of disclosure. Consequently, the final PTE limits access to a financial organization’s records to the Departments of Labor and Treasury. (The Treasury Department’s access was added as part of the final PTE.)

  • Retrospective review certification rules have been relaxed. Financial organizations must still conduct an annual review that is designed to assist the organization “in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the policies and procedures governing compliance with the exemption.” But while the proposed PTE required that the financial organization’s Chief Executive Officer (or equivalent) certify the details of the report, the final PTE now allows a “senior executive officer”—which includes the chief compliance officer, the president, the chief financial officer, or one of the financial organization’s three most senior officers—to certify compliance.
  • A self-correction provision has been added. Based on comments, the DOL added a new provision to the final PTE: a self-correction feature. Under this provision, the DOL will not consider a prohibited transaction to have occurred because of a failure to meet the PTE’s conditions if the
    • violation did not create a loss to the investor or if the financial organization made the investor whole for the loss;
    • financial organization corrects the violation and notifies the DOL within 30 days of the correction;
    • correction occurs no later than 90 days after the financial organization learned (or should have learned) of the violation; and
    • financial organization notifies those responsible for conducting the retrospective review, and the violation and correction are specifically set forth in the written report of the review.

The “Five-Part Test” Still Determines Fiduciary Status

In 1975, the DOL established a five-part test to determine fiduciary status, paralleled under the definition of “fiduciary” in Treas. Reg. 54.4975-9(c)(ii)(B). In 2016, the DOL finalized a new regulation meant to expand the definition of “investment advice.” In 2018, this final regulation was vacated by the U.S. Court of Appeals for the Fifth Circuit. Consequently, the 1975 regulatory text was restored. Under the 1975 regulation, an investment professional or a financial organization that receives a fee or other compensation is considered a fiduciary if it meets all of the following prongs of the test.

  • The investment professional or financial organization gives advice on investing in, purchasing, or selling securities, or other property.
  • The investment professional or financial organization gives investment advice to the retirement investor on a regular basis.
  • Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan, plan fiduciary, or IRA owner.
  • The retirement investor uses the advice as a primary basis for investment decisions.
  • The investment professional or financial organization provides individualized advice, taking into account the IRA’s or plan’s demographics, needs, goals, etc.

This five-part test relies on all the facts and circumstances that surround each scenario. But the DOL points out that not all recommendations, including recommendations to roll over plan assets to an IRA, would qualify as providing investment advice “on a regular basis.” Some such advice may truly be an isolated, one-time event. But other similar recommendations could be part of an ongoing relationship—or the start of an ongoing relationship—that could trigger fiduciary responsibilities. This is one reason that the DOL advises financial organizations and investment professionals to carefully consider their roles—even if they don’t think that their advice is provided on a regular basis.

The Final PTE Retains Four Main Requirements

Although the final PTE contains four provisions absent from the proposed PTE, the fundamental requirements remain. Briefly, here are those four elements.

  • Impartial Conduct Standards. The Impartial Conduct Standards impose three conditions.
    • The investment advice must be in the retirement investor’s best interest.
    • The compensation for the advice must be reasonable (and the best execution of the investment transaction must be sought, as required by federal securities laws).
  • The advice, when made, must not be materially misleading.
  • Before engaging in a transaction under the PTE, the financial organization must provide
    • a written acknowledgement that the financial organization and its investment professionals are fiduciaries under ERISA and the Internal Revenue Code (whichever applies);
    • a written description of the services to be provided and a conflicts-of-interest statement that is accurate and not misleading in all material respects; and
    • documentation that lists specific reasons for a rollover recommendation—before engaging in a rollover recommended under the PTE.
  • Policy and Procedures. Three requirements pertain to this element.
    • Financial organizations must establish, maintain, and enforce written policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards.
    • The policies and procedures must mitigate conflicts of interest to the extent that a reasonable person reviewing them as a whole would conclude that they do not create an incentive for the financial organization or investment professional to place their interests ahead of the retirement investor.
    • The financial organization must document the specific reasons that any recommendation to roll over assets from a plan to another plan or an IRA, from an IRA to a plan, from an IRA to another IRA, or from one type of account to another (such as from a commission-based account to a fee-based account) is in the retirement investor’s best interest.
  • Retrospective Review. Three requirements also apply to this provision.
    • The financial organization must conduct reviews (at least annually) that are designed to help achieve compliance with the Impartial Conduct Standards and with the policies and procedures governing compliance with the PTE.
    • A senior executive officer must receive a written report that addresses the methodology and results of the retrospective review.
    • A senior executive officer must certify each year that the retrospective review meets the detailed requirements in the PTE.

The DOL Rejects Its Analysis in the Deseret Letter

Throughout the final PTE, the DOL focuses on the potential conflicts of interest that rollover recommendations can pose. The final PTE cites the cumulative $2.4 trillion in ERISA Title I plans that was expected to be rolled over between 2016 and 2020. Given the enormous sums involved—and the general prohibition against an investment advice fiduciary receiving fees for recommending that a Title I plan participant roll over assets from a plan to an IRA—the DOL reaffirms an important assertion that it made in the proposed PTE.

In the final PTE, the DOL holds firm to its assertion in the proposed PTE that its analysis in Advisory Opinion 2005-23A (the “Deseret Letter”) was incorrect. The Deseret Letter stated that the advice to roll assets out of a Title I plan, even when combined with a recommendation as to how the distribution should be invested, did not constitute investment advice. The DOL now rejects this analysis. But the DOL has also indicated that it will not pursue claims for breach of fiduciary duty or prohibited transactions between the 2005 release of the Deseret Letter and February 16, 2021, “based on a rollover recommendation that would have been considered non-fiduciary conduct under the reasoning in the Deseret Letter.”

Other Takeaways from the Final PTE

The final PTE remains largely the same as the proposed PTE. But some of the DOL’s responses to the many comments it received—and other details contained in the preamble—seem worth noting.

  • Parties can clearly communicate that they do not intend to enter into an ongoing relationship to provide (or receive) investment advice. And a single sales transaction may not confer fiduciary status. So when reviewing the transaction, the DOL will consider the reasonable understanding of each of the parties. While statements forbidding reliance on advice are not determinative, they can be considered, as can marketing materials and other communications.
  • Compliance with the standards of other governing entities (such as the Securities and Exchange Commission) does not constitute compliance with the DOL’s final PTE. Although the DOL’s standards are intended to be consistent with securities law standards, the DOL has not provided a compliance safe harbor.
  • As mentioned above, before engaging in a transaction under the PTE, the financial organization (or investment professional) must provide the retirement investor with an acknowledgment of the organization’s fiduciary status in writing, a written description of the services to be provided (along with any material conflicts of interest), and—if recommending a rollover—documentation that lists specific reasons for the rollover recommendation. Although the PTE does not include model language that satisfies all aspects of the disclosure requirement, it does include model language that will satisfy an entity’s acknowledgment of fiduciary status. In addition, although the PTE does not require it, the DOL has included plain-language, model text that spells out a fiduciary’s obligations to the retirement investor.
  • What if investment professionals or financial organizations are uncertain about their fiduciary status? Clearly, they wouldn’t want to sign a fiduciary acknowledgement if they don’t meet each prong of the five-part test. And yet the final DOL indicates that parties cannot rely on the PTE “merely as back-up protection for engaging in possible prohibited transactions” while they try to deny the fiduciary nature or their investment advice. In particular, the DOL believes that, “in light of the broad scope of relief in the PTE, it is critical for [those] who choose to rely on the PTE to determine up-front if they intend to act as fiduciaries, and structure their relationship with the Retirement Investor accordingly.” So if investment professionals or financial organizations intend to act as fiduciaries, they should disclose this clearly; if they do not intend to act as fiduciaries, they should also disclose this—clearly and unequivocally—so that they do not tempt retirement investors to place unwarranted trust in them.
  • The DOL has extended the relief provided in Field Assistance Bulletin (FAB) 2018-02 until December 20, 2021. This FAB provides a transition period for parties to develop ways to comply with the final PTE. Specifically, the DOL indicates that “it [will] not pursue prohibited transaction claims against investment advice fiduciaries who worked diligently and in good faith to comply with Impartial Conduct Standards for transactions that would have been exempted in the new exemptions . . . .”

Looking Ahead

Over the past several years, we have experienced a whirlwind of investment advice guidance from different regulatory entities. This includes the DOL’s revising some of its own guidance. It is possible that, as a new administration evaluates priorities, it could revisit previously released guidance, including this final PTE. Ascensus will continue to analyze any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

Click here for a printable version of this issue of the Washington Pulse.


New Administration to Review Retirement Plan ESG Investments Guidance

On his first day in office President Biden issued an Executive Order entitled Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis. Included within the Order was what was described as a “non-exclusive” list of federal agency actions that will be reviewed for possible revision or withdrawal. Of particular interest on this list are recent Department of Labor final regulations issued under the title, Financial Factors in Selecting Plan Investments, which became effective on January 12, 2021.

This guidance is viewed by some as discouraging fiduciaries from considering environmental, social, and governance (ESG) factors when choosing retirement plan investments. It establishes in regulations parameters that fiduciaries must consider when selecting investments; for example, evaluating plan investments solely on financial factors and ensuring that participant interests are considered ahead of unrelated objectives. Further Biden administration action on this and other recent federal agency guidance of relevance will be closely monitored.


Investment Advice Fiduciary Class Exemption Published, Effective Date Set

Appearing in today’s Federal Register is Department of Labor Employee Benefits Security Administration (EBSA) Prohibited Transaction Exemption (PTE) 2020-02, which will provide guidance to investment advisors who counsel retirement and other investors. As noted in an Ascensus December 16 announcement, the guidance completes a process that began with 2016 regulations and exemptions issued under the Obama administration. Those regulations and exemptions were subsequently vacated in 2018 by a federal appeals court.

PTE 2020-02 maintains the impartial conduct standard that has been in effect since 2018, under which those who advise retirement and retail investors are to adhere to several principles:

  • receive only reasonable compensation;
  • make no misleading statements in the course of their advising; and
  • act in the client’s best interest.

With today’s publication of the guidance, PTE 2020-02 becomes effective February 16, 2021.


DOL Issues Investment Advice Fiduciary Class Exemption

The Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA) has issued a long-awaited class exemption, Prohibited Transaction Exemption (PTE) 2020-02, providing guidance to investment advisors who counsel retirement and other investors. The guidance completes a process that began with 2016 regulations and exemptions issued under the Obama administration, which were vacated in 2018 by a federal appeals court, and a promise by new DOL leadership under President Trump to issue new guidance in its stead. Yesterday’s issuance of a news release, fact sheet, and PTE 2020-02 completes that process.

PTE 2020-02 essentially maintains the EBSA impartial conduct standard that has been in effect since 2018, under which those who advise retirement and retail investors are to adhere to several principles:

  • receive only reasonable compensation;
  • make no misleading statements in the course of their advising; and
  • act in the client’s best interest.

Of particular significance is EBSA’s assertion in its news release that this guidance “expresses the department’s views on when rollover advice could be considered fiduciary advice under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.”

PTE 2020-02 will take effect 60 days after publication in the Federal Register.


DOL Final ESG Guidance Published

Today’s Federal Register includes the DOL’s final rule prescribing fiduciary obligations when selecting plan investments—guidance initially focused on restricting the use of environmental, social, and governance (ESG) investments. The final rule codifies several requirements for fiduciaries to consider regarding the promotion of non-financial objectives when selecting plan investments.

  • The final rule confirms that ERISA fiduciaries must evaluate investments based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.
  • The final rule includes an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA Section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  • The final rule also includes a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
  • The final rule added new regulatory text that sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone.
  • The final rule indicates that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan. A fiduciary is not prohibited from considering an investment fund or product merely because it seeks or supports one or more non-pecuniary goals, provided that the fiduciary satisfies the prudence and loyalty provisions in ERISA and the final rule. However, the provision prohibits adding such a fund as a qualified default investment alternative if the fund or product includes non-pecuniary factors.

The rule is effective 60 days after publication in today’s Federal Register: January 12, 2021.

 


DOL Releases Final ESG Guidance

The Department of Labor today posted on its website a final rule prescribing fiduciary obligations when selecting plan investments—guidance initially focused on restricting the use of environmental, social, and governance (ESG) investments. Indicative of the recent frenetic pace of agency guidance, a proposed rule was issued in June with a brief 30-day comment period ending July 30. The final rule was recently submitted for review with the Office of Management and Budget on October 14.

While sub-regulatory guidance has been issued from time to time over the years regarding the promotion of non-financial objectives when selecting plan investments, this final rule importantly codifies several requirements for fiduciaries to consider.

  • The final rule confirms that ERISA fiduciaries must evaluate investments based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.
  • The final rule includes an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA Section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  • The final rule also includes a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
  • The final rule added new regulatory text that sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone.
  • The final rule indicates that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan. A fiduciary is not prohibited from considering an investment fund or product merely because it seeks or supports one or more non-pecuniary goals, provided that the fiduciary satisfies the prudence and loyalty provisions in ERISA and the final rule. However, the provision prohibits adding such a fund as a qualified default investment alternative if the fund or product includes non-pecuniary factors.

This guidance is effective 60 days after publication in the Federal Register.


Retirement Spotlight: DOL’s Proposed Rule Solidifies Shareholder’s Rights, Including Proxy Voting

The term “fiduciary” can have many meanings. A fiduciary’s fundamental role is to act on another person’s behalf, such as when acting as a trustee of a trust. When Congress passed the Employee Retirement Income Security Act of 1974 (ERISA), one significant aspect of that legislation was to ensure that retirement plan administrators and other plan fiduciaries act “solely in the interest of the participants and beneficiaries”.

Since ERISA’s enactment over 45 years ago, Congress, the Department of Labor (DOL), and the Internal Revenue Service (IRS) have continued to issue regulations and other guidance to protect plan assets for participants and their beneficiaries. On August 31, 2020, the DOL issued a proposed rule intended to clarify an ERISA fiduciary’s duties with respect to shareholder rights, including proxy voting on corporate stock (a proxy vote generally occurs when an individual or an organization casts a ballot on behalf of a shareholder who is not directly voting on a particular issue.)

The proposed rule would amend DOL Regulation 2550.404a-1 (known as the “Investment Duties” regulation), by adding a new subpart (e) Proxy Voting and Exercise of Shareholder Rights. The DOL issued this proposed rule in part to correct a “persistent misunderstanding” that ERISA fiduciaries must vote on all proxies presented to them. There have also been substantial changes in how plan administrators invest their plan assets and in how the investment industry operates as a whole. The proposed rule is intended to align the Investment Duties regulation with these changes and with recent SEC guidance on the proxy voting process.

This proposed rule would apply to ERISA-covered pension, health, and other welfare plans (such as qualified defined contribution and defined benefit plans, certain 403(b) plans, and certain self-insured health plans) that hold shares of corporate stock. The proposed rule would apply to plans that hold stock either directly or indirectly through an ERISA-covered intermediary (such as a common trust or a master trust). The proposed rule would not apply to plans that hold stock through a registered investment company, such as a mutual fund.

 

Why the DOL Issued the Proposed Rule

The DOL is effectively codifying its existing position regarding plan fiduciaries who are considering whether to exercise a proxy vote (or other shareholder rights) or who are already exercising such rights. The proposed rule makes clear that such activities are subject to the general ERISA fiduciary duty rules that require fiduciaries to conduct such actions

  • prudently and solely in the interests of plan participants and beneficiaries,
  • for the exclusive purpose of providing benefits to participants and beneficiaries, and
  • to defray the reasonable expenses of administering the plan.

 

Fiduciary Considerations

The proposed rule also includes the following list of specific factors that fiduciaries must consider when

deciding whether to vote on a proxy (or other exercise of shareholder rights) or when actually voting a proxy.

  • Act solely in the plan’s economic interest. Fiduciaries must only consider factors that will affect the plan investment’s economic value. This decision must align with the plan’s investment objectives and funding policy.
  • Consider the effect on the plan’s investment performance. Fiduciaries must consider multiple factors—including comparing the amount of stock owned by the plan to the total amount of plan assets, determining the plan’s ownership in the stock issuer, and calculating any expenses related to the vote or other exercise of shareholder rights.
  • Do not subordinate the participants’ and beneficiaries’ interests. Fiduciaries cannot sacrifice investment return or take on additional risk to support goals that do not align with the plan’s or a participant’s and beneficiary’s financial interests.
  • Investigate material facts. Fiduciaries may not follow an advisory firm’s recommendations without appropriate supervision or verifying that the firm’s voting guidelines and its guidelines for exercising shareholders’ rights line up with the economic interests of the plan and its participants and beneficiaries.
  • Maintain records. Fiduciaries must document their activities—including their reason for voting a certain way.
  • Exercise prudence and diligence when selecting and monitoring advisory firms. Fiduciaries must also research any applicable administrative services and recordkeeping and reporting services.

Applying the Considerations

After considering the previous list of factors, a plan fiduciary would be allowed to vote by proxy only if the fiduciary determines that the vote would affect the plan’s economic interests. In addition to considering the required list of factors, the fiduciary would also need to consider the costs involved (including any research costs).

Setting Parameters

The proposed rule allows fiduciaries to establish specific parameters in their proxy voting policies as to when voting authority will (or won’t) be exercised. Such parameters must be “reasonably designed to serve the plan’s economic interest” and must be reviewed by the fiduciary at least every two years. The proposed rule provides three examples of such policies.

  • Relying on the issuer’s voting recommendations for proposals that the fiduciary has determined are unlikely to significantly affect the plan’s investment.
  • Focusing only on the types of proposals determined by the fiduciary to be substantially related to the corporation’s business activities or that are likely to significantly affect the value of the plan’s investment.
  • Not voting on proposals where the plan’s holding in a particular stock is below a threshold that the fiduciary determines is sufficiently small enough that the vote’s outcome will not have a material effect on the plan’s overall investments.

 

Plan Trustees Generally Responsible for Proxy Voting

The proposed rule states that plan trustees are responsible for proxy voting unless either the trustee is subject to the directions of a named fiduciary, or a named fiduciary has delegated authority to an investment manager. If the fiduciary has delegated authority to an investment manager, the investment manager generally has exclusive authority to vote proxies.

Investment managers that offer a pooled investment vehicle to more than one employee benefit plan must attempt to reconcile any conflicting investment policies. The investment manager must vote (or not vote) in a way that “reflects such policies in proportion to each plan’s economic interest in the pooled investment vehicle.” The investment manager may require fiduciaries of each participating plan to accept one general investment policy. Before doing so, fiduciaries would need to determine whether the investment and voting policies comply with ERISA.

 

Authorized Third Parties Must Document Voting Decisions

The proposed rule states that when a fiduciary delegates proxy voting authority to an investment manager or to a proxy voting firm, the fiduciary must require such investment manager or proxy advisory firm to document the rationale for its proxy voting decisions or recommendations, including demonstrating that the decision or recommendation was based on an expected economic benefit to the plan.

 

DOL Intends to Eliminate Interpretive Bulletin 2016-01

In 2016, the DOL issued Interpretive Bulletin (IB) 2016-01. This Bulletin gave plan fiduciaries greater flexibility, including allowing them to consider environmental, social, and governance factors—sometimes called “socially responsible” factors—when voting proxies.

The new proposed rule states that the DOL no longer believes that IB 2016-01 properly reflects an ERISA fiduciary’s proxy voting responsibilities. As a result, the DOL plans to remove IB 2016-01 from the Code of Federal Regulations when it finalizes this proposed rule.

 

Next Steps

The DOL is requesting comments on the proposed rule. Comments must be submitted on or before October 5, 2020.

Plan fiduciaries that invest in corporate stock directly or indirectly should start reviewing their proxy voting policies (and begin considering possible updates for when the final rule is issued). Plan fiduciaries should also ensure that they will be able to fully document their proxy voting activities.

Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments.

 

 

 

Click here for a printable version of this issue of the Retirement Spotlight.


Washington Pulse: PEP Model Evolves with DOL Proposed Registration Guidance

The DOL has issued a proposed rule on registration for pooled plan providers (PPPs), who may begin offering pooled employer plans (PEPs) on January 1, 2021. As this date quickly approaches, those who are considering offering or adopting a PEP need further guidance. But at least this proposed rule starts to answer some of the many questions that must be resolved before PEPs can become a viable alternative for employers.

 

Background

Single employer plans are established by individual businesses—or groups of closely related businesses, such as controlled groups or affiliated service groups. By contrast, multiple employer plans (MEPs) have generally been the solution for certain loosely related businesses that want to adopt a common retirement plan. Historically, the rules on who can participate in a MEP have presented significant obstacles for employers: only those in the same bona fide group, association, or professional employer organization (PEO) can adopt a MEP and, until the release of the final regulations on association retirement plans (ARPs) and other MEPs in July 2019, the rules defining such groups were unclear. While the ARP regulations provided much needed clarity and provided an opportunity for expanded use of MEPs, many believed the full potential for MEPs could still not be reached.

Congress addressed this perceived gap by creating the PEP framework in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was enacted in December 2019. PEPs offer a different way to gain access to retirement plans by allowing a MEP structure for unrelated businesses. By removing the commonality requirement previously associated with other MEPs, and by transferring most administrative and fiduciary duties from the employer to the PPP under a PEP arrangement, lawmakers hope to reduce employer barriers to adopting retirement plans for their employees.

While the SECURE Act provided a framework, many significant questions must be addressed before prospective providers can confidently enter the PEP marketplace. The SECURE Act directs various federal agencies to provide necessary guidance, including model plan language, that identifies the administrative duties and other actions required of PPPs. But even as we await further guidance, the SECURE Act provides important details about PEPs and PPPs.

NOTE: Before guidance describing the operational aspects of PEPs is issued, employers and pooled plan providers who comply in good faith with a reasonable interpretation of the SECURE Act provisions will be treated as meeting the requirements.

PEP documentation. The Treasury Department is required to issue model plan document language (as well as other guidance). The PEP plan documents must contain, among other things, the following provisions:

  • Designation and acknowledgement in writing that the PPP is a named fiduciary and plan administrator under ERISA.
  • Designation of one or more trustees (other than the employer) as responsible for collecting contributions, holding the assets of the plan, and implementing written contribution collection procedures.
  • Prohibition on unreasonable restrictions, fees, or penalties charged by the PPP to employers, participants, and beneficiaries with regard to ceasing participation or other plan transactions, such as distributions and transfers.

Fiduciary responsibilities. With single employer plans, employers bear fiduciary responsibility for plan operations; with pooled employer plans, PPPs are required to be a named fiduciary. So while employers cannot fully delegate all of their fiduciary duties, they can share the burden with the PPP.

Each employer in the PEP retains fiduciary responsibility for

  • Prudently selecting and monitoring the PPP,
  • Prudently selecting and monitoring any other named fiduciaries of the plan, and
  • Investing and managing their employees’ assets within the PEP (unless the PPP delegates this duty to another fiduciary, such as an investment advisor).

The PPP takes over plan administration—such as facilitating plan amendments, testing for compliance, and filing annual information returns—but employers still have a role in monitoring the PPP. The process begins, however, with the registration of PPPs.

 

Electronic Registration for Pooled Plan Providers

The SECURE Act requires each PPP to register with the DOL and the Treasury Department—and to register each PEP that it establishes. This requirement will be satisfied by completing the new Form PR – Registration for Pooled Plan Provider, which is included in the DOL’s proposed rule. By gathering this information, the DOL and Treasury will be better prepared to oversee the PEP market and to provide regulatory agencies, prospective employer customers, and the public with relevant data about available PPPs.

Each PPP will be responsible for its own registration and for any update or supplement to past filings.

  • Initial Registration – 30 to 90 days before beginning operations, the PPP must register with basic identifying information and a summary of its services, marketing activities, and any pending legal or regulatory actions in which they are involved. The DOL considers a PPP to begin operations when it begins publicly marketing a PEP. Under the proposed regulations, “preliminary business activities” may be undertaken before registration, but publicly marketing services as a PPP cannot.
  • Supplemental Notice – The PPP must inform the DOL of each new PEP and make supplemental filings within 30 days of any change to the initial registration—or of other changes such as a significant change in business structure of the PPP.
  • Amendments – Errors and omissions related to the initial registration must be corrected by amending the filing within a reasonable period following discovery.
  • Final Filing – The PPP must complete a final filing when the last PEP it administers is terminated and all assets have been properly distributed.

Consistent with regulatory efforts to simplify procedures and become paperless, the DOL will administer the registration process online with the same “EFAST 2” electronic filing system currently used to receive the Form 5500.

 

Comment Period

The proposed rule was published in the Federal Register on September 1, 2020 with a 30-day comment period, so the DOL will accept comments until October 1, 2020. Comment has been requested on various aspects of the PPP registration process to ensure that the proposed rule is not unreasonably burdensome. The DOL has specifically asked for comments on particular concerns, including whether PPPs should be required to report additional information upon registration and whether the DOL should refer to other filings to acquire information necessary for registration.

 

Next Steps

In order to make the registration platform available before the start of 2021, the DOL will need to issue a final rule on registration requirements soon after the comment period ends. The DOL’s proposed registration requirement alone is not likely to dissuade those institutions who are already preparing to become pooled plan providers. But more guidance on PEPs and PPPs is still needed.

 

Ascensus will continue to follow any new guidance as it is released. Visit ascensus.com for the latest developments.

 

Click here for a printable version of this issue of the Washington Pulse.


DOL Proxy Voting and Shareholder Rights Proposed Regulations in Today’s Federal Register

Appearing in today’s Federal Register are proposed regulations issued by the Department of Labor’s Employee Benefits Security Administration, intended to govern proxy voting and shareholder rights exercised by fiduciaries of ERISA-governed retirement plans. These proposed regulations will amend an existing investment duties regulation that has been in place since 1979.

(A pre-publication version of these regulations, and links to an EBSA news release and fact sheet, appeared in an Ascensus Industry & Regulatory News announcement on August 31.)

In the EBSA news release, the agency stated that there have been misunderstandings and confusion surrounding proxy voting and shareholder rights issues, and that the proposed regulations have the overall goal of “ensuring plan fiduciaries execute their ERISA duties in an appropriate and cost-efficient manner when exercising shareholder rights.”

Public comments will be accepted for a 30-day period, ending October 5, 2020.