Category Archives: service providers

The CARES ACT: Helping Your 401(K) Participants During the Coronavirus Crisis


401(k), plan sponsors, recordkeeper, service providers

Waiver of Required Minimum Distributions

Updated through July 28, 2020
By Fred Reish, Bruce Ashton and Betsy Olson

This is the third in our series of articles on special CARES Act provisions designed to help your 401(k) participants.  In our prior articles, we discussed the temporary loan enhancement rules and coronavirus-related distributions (CRDs).  Here we discuss the temporary relief from taking required minimum distributions.  NOTE: This article has been updated to reflect guidance issued after the original publication, in Internal Revenue Service (IRS) Notices 2020-50 and 2020-51.

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The CARES Act: Helping Your 401(K) Participants During the Coronavirus Crisis


401(k), plan sponsors, recordkeeper, service providers

Special Distributions to Qualified Participants

Updated through July 28, 2020
By Fred Reish, Bruce Ashton and Betsy Olson

Our first article discussed CARES Act provisions designed to help your 401(k) participants with temporary loan enhancements.  Here we discuss a second provision of the Act that can help participants who are affected by the coronavirus (called “qualified individuals”*).  This is a special coronavirus-related distribution (a CRD).  Though we discuss this in the context of 401(k) plans, the CRD provision applies to all qualified plans, 403(b) plans and IRAs as well.  NOTE: This article has been updated to reflect guidance issued after the original publication, in Internal Revenue Service (IRS) Notice 2020-50. 

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The CARES Act: Helping Your 401(K) Participants During the Coronavirus Crisis


401(k), plan sponsors, recordkeeper, service providers

The Enhanced Loan Provision for Qualified Participants

Updated through July 28, 2020
By Fred Reish, Bruce Ashton and Betsy Olson

With the spread of the coronavirus and the resulting closures and cutbacks, many 401(k) participants are working reduced hours, but are not considered to be terminated for purposes of ERISA. Furloughs and similar required leaves are common for businesses whose employees interact directly with retail customers, such as restaurants, stores, and gyms.

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Best Practices for Plan Sponsors #4


best practices, fiduciary, plan sponsors, prudent, service providers

What is the Baseline for A Committee to Act in the Best Interest of its Participants? (Part 3)

This is the fourth of the series about Best Practices for Plan Sponsors.

 In my last two posts (Best Practices for Plan Sponsors #2 and Best Practices for Plan Sponsors #3), I discuss the NYU case and the “bad” and “good” behavior of committee members. I concluded my last post with the point that process matters. Of course, it was unspoken that I was referring to a good process. This article discusses the fundamentals of a good process and the lessons learned from the NYU decision.

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Best Practices for Plan Sponsors #3


401(k), 403(b), best practices, plan sponsors, prudent, service providers

What is the Baseline for A Committee to Act in the Best Interest of Its Participants? (Part 2)

This is the third of the series about Best Practices for Plan Sponsors.

This is my second article about the case of Sacerdote v. New York University. As I discussed in my last post, the Court’s opinion pointed out the deficiencies in the understandings and conduct of some committee members. However, the Court ultimately ruled in favor of the plan fiduciaries and against the plaintiffs. Why was that?

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Best Practices for Plan Sponsors #1


401(k), 403(b), best practices, plan sponsors, service providers

Projection of Retirement Income

This is the first of the series about Best Practices for Plan Sponsors.

“Best Practice” is above and beyond the legal requirements. Best Practices are not mandated; they are elected.

While the most obvious Best Practices are automatic enrollment and automatic deferral increases, I want to start with the projection of retirement income for participants. That’s partially because it is in a current legislative proposal—in the Retirement Enhancement and Savings Act (RESA), and also because, in my opinion, it doesn’t receive the attention that it deserves.

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Interesting Angles on the DOL’s Fiduciary Rule #66


408(b)(2), broker-dealers, fiduciary, prudent, registered investment advisers, service providers

Concerns About 408(b)(2) Disclosures

This is my 66th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Because of the change in the definition of fiduciary advice (which applied on June 9, 2017), all advisors to retirement plans need to review their prior 408(b)(2) disclosures to see if changes are necessary. That particularly applies to broker-dealers and life insurance brokers and agents.

The first level of review should be to determine whether their prior 408(b)(2) disclosures to ERISA retirement plans affirmatively stated that they were not fiduciaries to the plans that they served. If so, those broker-dealers, insurance brokers and agents need to send out new 408(b)(2) disclosures that affirmatively disclose their new-found fiduciary status (assuming that their advisors became fiduciaries under the new rule, which would ordinarily be the case). However, if the old disclosures were silent about fiduciary status or non-status, the prior disclosures would only need to be reviewed to determine if they adequately describe the services that would be considered to be fiduciary advice. Those services would include, for example, making investment recommendations, referring to other investment advisors or managers, or providing selective lists of investments. (Actually, the definition is much broader, and also includes suggestions of investments, investment policies, or investment strategies.)

Also, the review should include consideration of whether the 408(b)(2) statements adequately disclose compensation. I have been reviewing 408(b)(2) disclosures for a number of broker-dealers. As a part of that, I noticed that compensation was often described in ranges, sometimes very broad ranges. That reminded me of the language in the preamble to the 408(b)(2) regulation, which said:

“A few commenters also asked whether compensation or costs may be disclosed in ranges, for example by a range of possible basis points. The Department believes that disclosure of expected compensation in the form of known ranges can be a ‘‘reasonable’’ method for purposes of the final rule. However, such ranges must be reasonable under the circumstances surrounding the service and compensation arrangement at issue. To ensure that covered service providers communicate meaningful and understandable compensation information to responsible plan fiduciaries whenever possible, the Department cautions that more specific, rather than less specific, compensation information is preferred whenever it can be furnished without undue burden.” [Emphasis added.]

I leave it to the reader to decide whether the ranges in the following types of disclosures are narrow enough. Keep in mind, though, that the purpose of the 408(b)(2) disclosures is to allow the responsible plan fiduciaries to determine (i) whether the compensation paid to the advisor and affiliates is reasonable in light of the services being rendered, and (ii) the nature and extent of the conflicts of interest. With that in mind, do you think that the following types of disclosures are narrow enough to provide information that allows the plan fiduciaries to make those determinations?

  • For mutual funds, the broker-dealer may receive between 0% to 10% front-end commissions.
  • As ongoing trailing commissions, the compensation may range from 0% to 2% per year.
  • The compensation for managed accounts will not exceed 2.5% per year.

Since the test for evaluating those statements is one of “reasonableness,” each reader can form his or her own opinions. But, keep in mind the dual purpose of the disclosures. Then, think about whether the disclosures adequately inform the responsible plan fiduciaries, so that they can make prudent decisions on behalf of their plans and their participants.

Needless to say, I am concerned that some service providers may be making disclosures that don’t satisfy the standards. As a result, I suggest that broker-dealers, RIAs, and insurance agents and brokers review their disclosures to make sure that they are comfortable that the necessary information is being provided to plan fiduciaries.

Forewarned is forearmed.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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Interesting Angles on the DOL’s Fiduciary Rule #61


DOL, fiduciary, prudent, service providers

The Fiduciary Rule, Distributions and Rollovers

This is my 61st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

Now that it seems likely that the fiduciary rule and the transition exemptions will continue “as is” until at least July 1, 2019, it’s time to re-visit the fiduciary rule and the requirements of the transition exemptions. This article focuses on the requirements for recommending that a participant take a distribution and roll it over to an IRA with a financial institution and its advisor. (Practically speaking, the financial institutions will likely be broker-dealers, RIA firms, and banks and trust departments). For ease of reading, this article uses “advisor” to refer to both the entity and the individual.

In order to recommend that a participant take a distribution, the financial institution and advisor must satisfy ERISA’s prudent man rule and duty of loyalty. That is because a recommendation to a participant is considered to be advice to a plan. Among other things, that means that, if the advisor violates the rules, there is a cause of action under ERISA for breach of fiduciary duty (as opposed to the Best Interest Contract Exemption, where a private right of action is less certain).

If the advisor will earn more money if a participant’s benefits are moved to an IRA, that will be a prohibited transaction. As a result, the advisor will also need to comply with the condition of an exemption, most likely the Best Interest Contract Exemption (BICE). The transition version of BICE requires that an advisor adhere to the Impartial Conduct Standards. Of those standards, the most significant for this purpose is the best interest standard of care. Since the best interest standard of care and ERISA’s duties of prudence and loyalty are substantially similar, this article just refers to the best interest standard (even though both apply). The best interest standard requires that an advisor obtain the information that is relevant to making a prudent and loyal recommendation about a distribution. The Department of Labor has said that, at the least, that includes the services, investments, and fees and expenses in both the plan and the IRA. In addition, the best interest standard requires that the plan and IRA information be evaluated in light of the needs and circumstances of the participant.

The information about the services, investments, and fees and expenses in the plan is the most difficult to obtain. Fortunately, that information can be found in the participant’s plan disclosure statements. Additional important information is in the participant’s quarterly statements.

But, what if the participant can’t locate the information? Realistically, that should be a rare case, since plan sponsors are required to distribute the disclosures at the time of initial participation and annually thereafter.

But, what if the participant can’t find those disclosure materials? In a set of Frequently Asked Questions, the DOL responded that an advisor must make “diligent and prudent efforts” to obtain the plan information. If the participant can’t find those materials, then it seems likely that, at the least, a diligent and prudent effort would require that the advisor inform the participant that:

  1. The information is usually available on the plan’s website and they could obtain it from that source.
  2. The information is available from the plan sponsor upon request to the benefits personnel.

If neither of those options is successful, or if the participant is unwilling to take those steps, the advisor can use information from the Form 5500 or from industry averages. (Interestingly, 5500 data is not considered primary data for this purpose. It can only be used after a diligent and prudent effort has been made to obtain current plan data from the participant.)

Even where 5500 data or average plan data is used, there are additional considerations:

  • The advisor must provide “fair disclosure” of the significance of using the primary plan data, that is, current information about the plan from, e.g., the participant disclosure forms.
  • Plan averages must be based on “the type and size of plan at issue.” As a result, the advisor will need to know the type and size of the plan.
  • The advisor must explain the alternative data’s limitations.
  • The advisor must explain “how the financial institution determined that the benchmark or other data were reasonable.”

However, it would likely be a rare case that alternative data could be used. If a financial institution finds that its advisors are consistently using alternative data, that suggests that the advisors are not making “diligent and prudent efforts” to obtain actual plan data. The consequence of non-compliance is that the compensation paid from the rollover IRA is prohibited and cannot be retained by the financial institution or the adviser. There could also be an ERISA claim for breach of fiduciary duty.

An additional issue is that the “alternative data” may only include information about fees and expenses. In order to perform a best interest analysis, the advisor must also have information about a plan’s services and investments. For example, does the plan offer a brokerage account where, if the participant desired, the participant could have access to a wider range of investments? Another example is whether the plan offers discretionary investment management for participants’ accounts. If it does not, that may be a valuable service offered by the IRA; but, if it does, the expenses and the quality of those services in the plan and IRA should be compared.

As this article suggests, there are more issues than appear at first blush.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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Interesting Angles on the DOL’s Fiduciary Rule #52


BICE, DOL, fiduciary, prudent, service providers

The Fiduciary Rule and Exemptions: How Long Will Our Transition Be?

This is my 52nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

The fiduciary regulation that dramatically expanded the definition of fiduciary investment advice went into effect on June 9. As a result, virtually all advisers to plans, participants and IRAs are now fiduciaries, or will be as soon as they make the next investment recommendation to one of those qualified accounts. At the same time—June 9, the “transition” transaction exemptions were effective.

If viewed out of context, the fiduciary regulation, as currently written, will continue in effect for years to come. However, the transition exemptions will only apply until December 31, when the full exemptions will apply, with their many and demanding requirements. But, that’s out of context.

When viewed in context, the situation looks much different. For example, the Department of Labor will be publishing the Request for Information asking, among other things, about the potential impact of the fiduciary rule and changes that may be needed. Not to be outdone, the SEC has asked a series of questions about a possible fiduciary standard for all investment advice within its purview. The SEC and DOL have indicated that they will be working together to develop their respective fiduciary definitions (and, in the case of the SEC, a fiduciary standard of care) or, perhaps, they will develop an identical definition of fiduciary advice.

In addition, the DOL has asked for input concerning the structure and requirements of the prohibited transaction exemptions, including the two exemptions that impact most advisers . . . the Best Interest Contract Exemption (BICE) and Prohibited Transaction Exemption 84-24. Those exemptions are exceptions from the prohibited transaction rules, but come with strings attached. On the other hand, the SEC does not have a statutory basis for adopting similar prohibited transactions or, for that matter, exemptions from prohibited transactions. Because of those differences, it is likely that, even if the two regulatory bodies adopt a common definition of fiduciary advice (and a common standard of care), their treatment of conflicts of interest will vary.

As mentioned earlier, the transition period for the DOL’s exemptions is only until December 31. And, if I haven’t made clear, there isn’t any transition period for the fiduciary regulation; it is in full force and effect.

What does this mean in terms of timing? My view is that it will be virtually impossible for the DOL and SEC to collaborate on the development of a common, or at least compatible, definition of fiduciary advice and standard of care before December 31. Because of the Administrative Procedures Act, the final regulation would need to be published in early November, which means a proposed regulation would probably need to be published in early to mid-September. To hit those deadlines, the two regulatory bodies would need to develop a proposed regulation within that time frame. That seems almost impossible —partially because of the need for coordination and partially because the SEC hasn’t previously proposed guidance on these issues. In other words, even though the DOL has a basis for revising its regulation and exemptions, the SEC doesn’t.

As a result, my view is that the DOL will extend the transition period, perhaps for as much as a year. That would allow time for the two agencies to work together in a thoughtful manner and at a reasonable pace.

That is both good news and bad news to the regulated community, that is, for financial services companies. It is good news because it allows more time to fully adapt to the new rules and because the compliance requirements for the transition exemptions are not that difficult or burdensome. It is bad news—at least for those firms that strenuously object to the fiduciary rule, because, by a year from now, financial services companies will be in compliance with the fiduciary standard and fiduciary advice will have become the standard course of business. The training will have been done, products will have been developed, solutions will have been implemented, and so on. In other words, the fiduciary standard will have become the norm. As a result, it may be more difficult to change the fiduciary definition and standard of care. On the other hand, there will still be significant changes to the exemptions and, particularly, to the Best Interest Contract Exemption.

One way or another, I expect that we will hear, in August or September, that the transition period is being extended.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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Interesting Angles on the DOL’s Fiduciary Rule #49


408(b)(2), broker-dealers, DOL, fiduciary, prohibited transaction, prudent, registered investment advisers, service providers

The Requirement to Disclose Fiduciary Status

This is my 49th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.

When the new fiduciary rule applies on June 9, it will convert most non-fiduciary advisers into fiduciaries.

While there is not a disclosure requirement for new fiduciary advisers to IRAs, there is for these newly minted fiduciary advisers to plans. But it’s not part of the new regulation. Instead the requirement is found in the 408(b)(2) regulation which was effective in 2012.

As background, that regulation required that service providers to ERISA-governed retirement plans, including advisers, make written disclosures to plan fiduciaries of their services, compensation and “status.” The status requirement was that service providers disclose if they were fiduciaries under ERISA and/or the securities laws (e.g., RIAs). The regulation describes the status disclosure as follows:

If applicable, a statement that the covered service provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services pursuant to the contract or arrangement directly to the covered plan…as a fiduciary…; and, if applicable, a statement that the covered service provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services pursuant to the contract or arrangement directly to the covered plan as an investment adviser registered under either the Investment Advisers Act of 1940 or any State law.

(The reference to “subcontractor” includes representatives of broker dealers who are independent contractors.)

For the most part, broker-dealers, and insurance agents and brokers, have taken the position that they were not fiduciaries and therefore did not make the fiduciary disclosure. And, if they were not in fact fiduciaries, those disclosures worked from July 1, 2012 until June 9, 2017, when the new definition will make them fiduciaries.

Technically, that last sentence is not absolutely correct. Let me explain. First, the new regulation requires that, to be considered a fiduciary, the adviser (and the supervisory entity) must make an investment recommendation. And, until the first investment recommendation is made, the adviser and entity are not fiduciaries. However, the definition of investment recommendation is so broad that it may be best to treat June 9 as the day they became fiduciaries. For example, a recommendation is a “suggestion” that the plan fiduciaries select, hold or remove investments; that the fiduciaries use a fiduciary adviser to give advice on investments or to help participants with investments; that the fiduciaries include certain specified policies in the IPS; and so on.

In other words, under the new rules it’s hard for an adviser to work with a plan without being a fiduciary.

So, accepting that virtually all advisers to plans become fiduciaries on June 9, what does that mean for disclosure of fiduciary status?

The 408(b)(2) regulation generally provides that, after the initial notice is provided, no subsequent disclosures are required until there is a change in the information initially provided. But, of course, where the first notice was silent about fiduciary status, the transition to fiduciary status is a change. Here’s what the regulation says about changes:

A covered service provider must disclose a change to the information…as soon as practicable, but not later than 60 days from the date on which the covered service provider is informed of such change, unless such disclosure is precluded due to extraordinary circumstances beyond the covered service provider’s control, in which case the information must be disclosed as soon as practicable.

In other words, the service provider (e.g., the broker dealer and adviser) must make a written disclosure of the change to fiduciary status to the “responsible plan fiduciary” within “60 days from the date on which the [broker dealer/adviser] is informed of such change.” Unfortunately, there isn’t any guidance on when a service provider is “informed” of the change to fiduciary status under these circumstances. For example, was it the day that it was finally determined that the fiduciary regulation would be applicable on June 9? Or, will it be on June 9? Or, will it be the first day that the adviser makes the first post-June 9 recommendation?

In the absence of clear guidance, a conservative approach may be advisable. So, my suggestion is that the change notice be sent in June. That’s not my conclusion about the outer limit; instead, it’s a conservative position.

The consequence of the failure to make 408(b)(2) disclosures is that compensation paid the broker-dealer and the adviser is prohibited.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.

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