In a recent article published by the Credit Union National Association, Dennis Zuehlke discusses the recently passed tax-reform bill eliminating the ability to reverse a Roth individual retirement account (IRA) conversion, also known as a recharacterization. He warns that individuals who convert and do not seek tax advice may not be aware of the tax impact until they file their federal tax return months later.
The U.S. Fifth Circuit Court of Appeals has finally made it official: the 2016 Department of Labor (DOL) fiduciary investment advice final regulations and accompanying guidance are repealed. On June 21, 2018, the Fifth Circuit issued the formal mandate that implements its March 2018 ruling “vacating” (i.e., making null and void) this much-contested guidance, whose purpose was to provide retirement savers with greater protection from conflicted and potentially exploitive investment advice. Attempts during the March-to-June interval to appeal the Fifth Circuit’s ruling and save the fiduciary guidance ultimately proved unsuccessful.
It is not completely clear what this outcome will mean for investment advisors and advisory firms in their future relationships with retirement savers. DOL regulations dating back to 1975—intended for replacement by the now-repealed 2016 guidance—may once again provide the standard that determines fiduciary status. 1996 and 2005 DOL sub-regulatory guidance may also shed additional light. It is hoped that the DOL will release formal guidance soon in order to provide greater clarity regarding future investment fiduciary standards.
How the DOL Investment Fiduciary Guidance Was Defeated
Several earlier District Court challenges to the fiduciary guidance ended with multiple lower courts all upholding it. One of these was a Texas District Court decision, which was appealed to the Fifth Circuit Court of Appeals. There the fiduciary guidance suffered its first defeat. Perhaps more important, the Fifth Circuit’s March ruling had sufficient authority to vacate “in toto” the final regulations and several accompanying prohibited transaction exemption (PTE) components. All were eliminated, in all legal jurisdictions nationwide. The Fifth Circuit judge writing for the majority rebuked the DOL for over-stepping its authority in issuing the 2016 guidance.
The Fifth Circuit’s decision was not unanimous. The three-judge Fifth Circuit panel (the full Fifth Circuit Court of Appeals has nine members) that rendered the decision was split 2-1. Had this ruling occurred during the Obama administration, with the same DOL leadership that had issued the guidance, the loss would in all probability have been appealed. With the Trump administration and its new DOL leadership committed to revising or withdrawing the guidance, the Fifth Circuit’s ruling was welcomed by the DOL, rather than challenged. Others—including the states of California, Oregon, and New York, in concert with the American Association of Retired Persons (AARP)—sought standing to appeal, but were denied. The ultimate deadline of June 13, 2018, for a DOL appeal to the Supreme Court passed as expected, and eight days later came the Fifth Circuit mandate that sealed the fiduciary guidance’s fate.
What Happens Next?
Over the slightly more than two years since the DOL investment fiduciary final regulations and exemptions were issued in April 2016, many financial organizations and investment advisors have made changes to their business models, compensation practices, and investment lineups to comply with new rules. Some even acknowledged fiduciary status as part of the new compliance regime. Will these changes be modified or reversed? Can a firm or advisor disclaim a fiduciary role after having embraced it? Does any DOL guidance issued from 2016 to the present have continued purpose or bearing on investment advising relationships?
Other DOL Investment Fiduciary Guidance; More is Needed
Financial organizations, investment advisors, and service providers who serve them are wondering what past guidance can—or should—be relied on now that the 2016 final regulations and accompanying PTEs have become invalid. Possibilities include the following.
- The DOL 1975 regulations specified a five-part test to determine if investment advice is fiduciary in nature, but generally apply only to advising that is associated with employer-sponsored retirement plans, not IRAs.
- Interpretive Bulletin (IB) 96-1 clarified what constitutes investment information versus investment advice. IB 96-1 describes safe harbors to help employers guard against unintentionally providing information that could be construed as investment advice.
- DOL Advisory Opinion 2005-23A addressed limited circumstances in which a person who is already a fiduciary to an employer-sponsored retirement plan could become an investment fiduciary when plan assets are rolled over from the plan to an IRA. According to this 2005 guidance, an individual who is not already a plan fiduciary may provide IRA rollover advice without becoming an investment fiduciary.
- DOL Field Assistance Bulletin (FAB) 2018-02 was written after the Fifth Circuit’s March ruling vacating the final investment fiduciary regulations and exemptions. Anticipating this guidance to be eliminated, FAB 2018-02 provided for a transition period during which relaxed impartial conduct standards are to apply, accompanied by lenient enforcement. The impartial conduct standards require that those who provide investment advice for a fee
- make no misleading statements,
- receive only reasonable compensation, and
- act in a client’s best interest.
FAB 2018-02 states that these standards are to apply “until after regulations or exemptions or other administrative guidance has been issued.”
The DOL has remained silent following the Fifth Circuit’s June 21, 2018, mandate officially invalidating the investment fiduciary guidance. Within the investment advisory and retirement industries it is widely hoped that the DOL will soon release more definitive guidance, providing greater clarity and assurance regarding the agency’s investment fiduciary standards and compliance expectations.
Proposed SEC Fiduciary Guidance
As the fate of the DOL investment fiduciary guidance was being determined in the judicial system, the Securities and Exchange Commission (SEC) in April issued proposed guidance for broker-dealers and registered investment advisors who make recommendations to retail clients. The agency did so eight years after the Dodd-Frank Wall Street Reform and Consumer Protection Act gave the agency a directive to consider issuing standards of conduct for investment recommendations.
The proposed rules generally do not apply to banks or credit unions unless they are (or own) a broker-dealer or a registered investment advisor. The rules do appear to cover individual plan participants receiving direct investment recommendations, but exclude employer plans per se as a business exception. The guidance is also believed to cover investors in individual tax-advantaged accounts, such as IRAs, health savings accounts, and education savings accounts, but only for securities investments, which greatly limits the reach of this SEC guidance. The proposed SEC package contains three items.
- A “Regulation Best Interest” for broker-dealers
- A rule requiring disclosure of the nature of the advising relationship (fiduciary or not), and restraints on use of the term “advisor”
- Clarifications on fiduciary standards applicable to investment advisors
Although the full impact of the SEC proposed guidance is undetermined at this time, the SEC has indicated that the final guidance will generally include advice given to retirement savers who are invested in securities and are receiving investment advice from broker-dealers or registered investment advisors. The SEC is accepting public comments for a 90-day period, which began on May 9, 2018.
Still unknown at this time is the extent to which there will be coordination—and hopefully commonality—between the SEC and DOL guidance that will ultimately govern investment advising relationships.
NOTE: See SEC Best Interest Standard is Major Departure from DOL Fiduciary Guidance, for more information on the proposed SEC guidance or visit www.ascensus.com for the latest developments.
The U.S. Fifth Circuit Court of Appeals has released its official mandate document vacating (repealing) the Department of Labor’s (DOL’s) 2016 fiduciary investment advice final regulations and accompanying prohibited transaction exemptions. This action officially seals the repeal of this guidance, which has been the subject of intense debate and opposition for the last several years. Multiple attempts had been made by the DOL during the Obama administration to arrive at guidance that would provide greater protection for retirement investors, while considering the challenges faced by the investment advising industry.
The Fifth Circuit Court’s mandate has been expected since the deadline for a possible appeal passed earlier this month. The original Fifth Circuit Court ruling striking down the DOL fiduciary guidance was issued in March. When the DOL failed to appeal the Court’s decision and attempt to save the guidance, several states joined the American Association of Retired Persons (AARP) in seeking standing to appeal, but were denied.
Multiple delays in full implementation and enforcement of the 2016 fiduciary guidance had followed the transition from the Obama administration-led DOL to the present administration and its DOL leadership, which advocated the guidance’s reexamination or rollback. A temporary relaxed enforcement policy was announced in May, to be in effect until full implementation and enforcement, which officially were scheduled for July 1, 2019. Some industry watchers, however, doubted that the 2016 fiduciary guidance was likely to take full effect in its current form.
No statement on today’s Fifth Circuit Court mandate vacating the guidance has yet been issued by the DOL.
Under an agreement announced today (April 12) by the Treasury Department and the White House Office of Management and Budget (OMB), many future Treasury regulations are likely to receive more extensive review before release. The agreement reflects an April 2017 executive order of President Trump to review a policy that since 1983 had allowed for expedited issuance of certain Treasury regulations.
Under the new policy announced today, most Treasury regulations will be subject to a 45-day review by OMB’s Office of Information and Regulatory Affairs (OIRA) before publication in the Federal Register. (An exception is to be made for Treasury regulations that pertain to the Tax Cuts and Jobs Act, tax reform legislation enacted in December of 2017, as such regulations would instead be subject to a 10-day expedited review process.)
According to the agreement, OMB’s 45-day review is to take the following questions into consideration.
- Will the proposed Treasury regulation create an inconsistency with regulations planned by another federal agency?
- Could the regulation “raise novel legal or policy issues?”
- Is the regulation expected to have an impact on the economy of $100 million or more?
In a recent article published by The Wall Street Journal, SVP Peg Creonte discusses new 529 plan tax legislation and the potential consequences associated. New federal tax rules state that up to $10,000 tax-free from a 529 account can be spent on K-12 schooling expenses. However, some states have not yet updated the legislative language used, resulting potential tax consequences of withdrawal. Creonte states that, “You should make sure that your state has a clear policy on how withdrawals for private K-12 will be treated from a tax perspective.”
An amendment to New York’s state finance law has established an IRA-based retirement savings program for the state’s private sector employers and their employees. Full establishment of the program is envisioned within 24 months.
The New York State Secure Choice Savings Program is to be a Roth IRA-based program that complies with Internal Revenue Code requirements for Roth IRAs. The program is to cover employees age 18 or older who have compensation from an employer (either for-profit or nonprofit) engaged in an enterprise in the state of New York, an employer that has not offered a “qualified retirement plan” within the two prior years. “Plan” is to include such traditional qualified plans as profit sharing/401(k), money purchase, target benefit, and defined benefit plans, as well as 403(b), SEP, and SIMPLE IRA plans, and governmental 457(b) plans.
Employees will be offered an opportunity to contribute or to decline participation. If no election is made, employees would be automatically enrolled and contributions withheld from their compensation at a rate of three percent. Employees can opt out of participation at any time or may change their rate of contribution. Other provisions of the program as identified in the state’s finance law amendment include the following.
- A governing Board is to choose available investments, with an initial default investment proposed to be a life-cycle or target date fund; future options to potentially include principal protection, growth, and “secure return” investment options.
- Investments are to be pooled to take advantage of cost savings “through efficiencies and economies of scale.”
- The Board would set minimum and maximum contributions consistent with Roth IRA rules, as well as determine withdrawal provisions.
- Employers participating in the program will “begin employee enrollment at most nine months after the Board opens the program for enrollment.”
- A website is to be established to provide information and enable participant transactions.
- Communications with employees will be provided in eight specified languages, and others as “the state comptroller deems necessary.”
- Deposits of amounts withheld from employee pay are to occur no later than the last day of the month following the month of withholding, and consistent also with an employer’s deposit requirements for income tax and unemployment insurance withholding.
- There would be no New York state funding obligation or liability.
- Employers would not be liable for employee participation decisions or governing board decisions.
The program’s governing board may delay implementation beyond the anticipated 24-month period if adequate funds to administer the program are not obtained. Funds for such administration can come from state, federal, or local government sources, as well as any individual, firm, partnership, or corporation.
After passage by the House and Senate, President Trump today signed the omnibus federal budget appropriations bill after an initial veto threat. The legislation that was needed to avert a federal agency shutdown and to assign funds to spending priorities through the rest of the fiscal year.
Conspicuously absent from the legislation was a package of retirement savings provisions contained in the bipartisan-sponsored Retirement Enhancement and Savings Act (RESA) of 2018, which some anticipated might be attached to the appropriations bill. The RESA package had wide bipartisan support, and was co-sponsored by Senate Finance Committee Chairman Orrin Hatch (R-UT), who has announced his retirement at the end of his current Senate term.
Despite its absence from the appropriations bill, many feel that RESA has favorable prospects for being attached to other must-pass legislation in 2018 or advancing to consideration and possible enactment on its own. See the Ascensus summary of the RESA.
The IRS has released the detailed Instructions for Form 8915B, Qualified 2017 Disaster Retirement Plan Distributions and Repayments. The Form 8915B itself was released earlier in March. This is a taxpayer form used to report taxation and/or repayment of certain amounts withdrawn from IRAs and employer-sponsored retirement plans by victims of specified 2017 natural disaster events for which special tax relief has been provided.
The IRS previously released Form 8915A for taxpayers to report similar transactions resulting from 2016 disaster events.
Qualified distributions identified on this form are eligible for exemption from the 10 percent additional tax on early distributions, for proportional taxation of such amounts over three years, and have a three-year window for repayment of the withdrawn amounts.
Members of the House of Representatives have introduced their body’s companion version of the Retirement Enhancement and Savings Act (RESA) of 2018, which is a bill that was introduced in the Senate on March 9. The House bill’s lead sponsors are Representatives Mike Kelly (R-PA) and Ron Kind (D-WI), with more than a dozen co-sponsors from both political parties.
Among its many proposed changes, the legislation would open the door for employers to participate more freely in multiple-employer plans, liberalize numerous IRA and employer plan provisions, and expand employer tax credits for plan startup and automatic enrollment. (See Ascensus’ Washington Pulse summary of the Senate version bill.)
There is speculation that the RESA legislation could be added to an omnibus federal agency appropriations package many expect to be voted on this week. Progress of both House and Senate bills will be monitored closely.
The IRS has released Revenue Procedure 2018-21, modifying existing rules used by pre-approved defined benefit plans to calculate interest credits. The updated rules now allow for pre-approved defined benefit plans containing a cash balance formula to provide for the actual rate of return on plan assets as the rate used to determine said interest credits. This method was previously not allowed for pre-approved cash balance plans, for which IRS will issue approval letters this month.