The U.S. Department of Labor's Employee Benefits Security Administration has announced final guidance that amends the Department of Labor's regulation on participant fee disclosures. This amendment provides plan administrators with more flexibility when sending the annual disclosures to participants and beneficiaries in retirement plans.
The rule changes the requirement by adding two months to the period of time that a plan administrator can provide the disclosures. Prior to the amendment, a plan administrator was to provide the annual disclosures at least once in any 12-month period. The amendment now says that the disclosures are to be provided once in any 14 month period. The additional two months provided by the rule are in response to comments received by the department that plan administrators need more flexibility for these annual disclosures to avoid unnecessary costs. The plan administrator is still required to disclose the same information as they were before the amendment.
The proposed rule will be published in the March 19th edition of the Federal Register1. EBSA is soliciting comments on the rule which are due 30 days from the date of publication.
The direct final rule is accompanied by a notice of proposed rulemaking. If EBSA receives significant adverse comment during the public comment period, it will withdraw the direct final rule and then address the comments in a subsequent final rule. The direct final rule is otherwise effective on June 17, 20152.
The Department also announced that a temporary enforcement policy that is effective immediately and will be implemented until the final rule takes place3. EBSA will treat a plan administrator as satisfying the current 12-month rule if annual disclosures are made within the new 14-month deadline. This action must be determined by the plan sponsor as benefiting the participants.
DOL Fiduciary Rule Update
In 1975, the Department of Labor (DOL) issued the original regulations on the definition of fiduciary that we are regulated by today. In 2010, the DOL issued proposed regulations which would have revised the definition of fiduciary, but was forced to withdraw them. The DOL recently sent its re-proposed "fiduciary rule" to the Office of Management and Budget (OMB) for review. The new review is long overdue based on the fact that retirement plans have changed a great deal since the last rule was established 35 years ago. Not only has the 401(k) been invented since 1975, but there have been many technological advances that change the way that the financial services industry does business. Therefore, this review was inevitable and probably should have occurred long before now.
The OMB sent the proposal to the Federal Register on April 14th. There will be a public comment period and a public hearing on the rule's provisions will be held to discuss details.
SEC Uniform Fiduciary Standard
The Department of Labor and the Securities and Exchange Commission are both reviewing the fiduciary issues. However, they are taking different approaches on the matter. SEC Chairman Mary Jo White testified before the U.S. House of Representatives Committee on Financial Services discussing the uniform fiduciary standard. As background, Section 913 of the Dodd-Frank Act granted the SEC authority to impose a uniform standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers, but did not require it to do so.
During her testimony, White set forth her personal belief that there should be such a uniform standard, but also discussed the challenges in proposing such a uniform standard. Committee members brought up potential concerns with the DOL and the SEC working without coordination. White clarified during the hearing that the DOL and SEC are separate agencies with responsibilities to enforce separate statutes4. She also reviewed how the SEC staff has provided the DOL with technical assistance as the DOL also gets ready to issue changes to the definition of fiduciary under ERISA. White made it clear that both she and the SEC staff are committed to continue conversations with the DOL, both to provide such technical assistance and information on the SEC's approach, as well as to discuss the practical effect that amendment to the definition of fiduciary under ERISA will have on retail investors and investor choice.
Auto Enrollment is Made Easier
The Treasury Department and the Internal Revenue Service have recently issued new guidance making it easier for employers to correct contribution errors when using auto enrollment and auto escalation. The new safe harbor actions allow plan sponsors to correct the missing deferrals without having to notify the IRS. The correction has to be made within 9 ½ months from the end of the plan year that the mistake was made5.
The Treasury and IRS also had additional safe harbor guidance issued on how plan sponsors calculate the corrective contributions to make, which includes the employer match.
The new safe harbor changes are effective immediately, but are projected to end on December 31, 20206.
Tibble v. Edison
The Supreme Court has chosen to review the Tibble v. Edison International court case for the 2014-15 term. This is a significant court case in the retirement plan industry because it claims that ERISA plan fiduciaries breached their duty of prudence by offering higher cost retail mutual funds in a 401(k) plan. As background, a group of participants and beneficiaries entered into a class action lawsuit accusing Edison International of choosing higher cost retail mutual funds when lower cost institutional mutual funds were available.
The district court has already determined that the retail mutual funds were added to the plan in 1999, which was eight years before the complaint was filed7. Since "fiduciary breach" and "prohibited transaction" claims are not subject to the six year limitations period in ERISA section 413, the district court could not make a determination as to whether the time limitations were applicable or not.
Although the time limitation is a significant issue in this case, there are arguments that the true issue is the fact that Edison International committed a prohibited transaction by choosing the more expensive retail mutual funds rather than the less expensive institutional mutual funds. As the Supreme Court reviews both issues, it will be interesting to see what precedence this may set for the future of fiduciary responsibility, as well as what decision the court makes on the ERISA section 413 time limitations.
1 Department of Labor. DOL.gov. 4/1/2015.
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