United States: What’s Coming Up From The Department Of Labor

Last Updated: October 15 2014
Article by Michael Kovacs

The Department of Labor (DOL) is working on several important initiatives in 2014 covering a broad range of retirement plan issues. Here is a review of some initiatives affecting qualified retirement plans.

A New Regulation

Target date funds (TDFs) allow a plan participant to essentially put their investing on autopilot and rely on fund managers to control the level of risk in their investments. The DOL continues to look at additional regulations regarding TDFs. Specifically, one proposal pertains to information about TDFs that plan sponsors must furnish to plan participants when those funds are used as a qualified default investment alternative (QDIA). The DOL amendment provides relief for participant-directed individual account plan fiduciaries from certain fiduciary responsibilities when investing the participant's account in a QDIA in the absence of participant directions.

The new proposed regulation adds greater specificity to required plan investment disclosures. The new disclosure standards apply both when the TDF is the QDIA and when it is one of multiple investment choices available to participants.

Standards for Brokerage Windows

DOL's Employee Benefits Security Administration (EBSA) will review the use of brokerage windows in participant-directed individual account retirement plans. Instead of a limited number of funds selected by the plan sponsor, a brokerage window gives plan participants access invest in almost any investment in the market. That increase in available investments can also mean an increase in the level of risk taken on by the participant.

EBSA is set to explore whether, and to what extent, regulatory guidance on fiduciary requirements and regulatory safeguards are appropriate for plans that allow participant-directed investments through brokerage windows. Later this year EBSA will begin the review with a request for information.

Illustrating Lifetime Income Streams

Many employees have trouble translating 401(k) account values to a lifetime income stream in retirement. It also can be challenging for retired participants to withdraw retirement assets at a pace that will reduce the risk that they run out of money in old age. Thus there has been more discussion about adding annuity options to 401(k) plans.

The Pension Protection Act of 2006 (PPA) amended the ERISA section governing benefit statements to require plans to provide annuity illustrations. Currently, plans must provide participants and certain beneficiaries with individual pension benefit statements.

Current regulations require defined benefit plans to provide the statement every three years (unless they come up with another DOL-approved schedule). Defined contribution plans that let employees choose their investments must provide the statement quarterly. Defined contribution plans that do not let participants choose their investments must provide the statement annually.

In 2014, the DOL will "explore whether, and how, an individual benefit statement should and could present a participant's accrued benefits in a defined contribution plan (i.e., the individual's account balance) as a lifetime income stream of payments, in addition to presenting the benefits as an account balance." Because of concern of liability by plan sponsors, many in the retirement industry would like to see the DOL encourage, but not mandate, the inclusion of this information. Many also want to make it clear that these projections are educational and do not increase fiduciary exposure.

Conflicts-of-Interest Rule

This has been a contentious issue since the original notice of proposed rulemaking in 2010. The original proposal would essentially have expanded the scope of fiduciary status to "those persons who render investment advice to plans and IRAs for a fee." The DOL proposed the change believing that advisors are subject to conflicts of interest, and therefore, participants are subject to risk, because of recent changes in the investment advice business and how advisors are compensated.

The original proposal to expand fiduciary status would have included advisors employed by broker-dealers. That triggered a loud backlash from those who would suddenly be held to a much higher standard of accountability. It is anticipated that the proposal's next version will backtrack on the scope of individuals deemed to be fiduciaries.

Annuity Selection Safe Harbor

In 2008, the DOL established a safe harbor "for satisfaction of fiduciary responsibilities in selecting an annuity provider and contract for benefit distributions from an individual account retirement plan." More recently, however, the DOL and the Treasury Department issued a request for information seeking comments on what they can do to encourage defined contribution plans to offer annuities or other arrangements that provide a lifetime stream of income after retirement. Again, this is DOL's focus on the risk that participants run out of money in old age.

Based on input received, the DOL is developing proposed amendments to the annuity selection safe harbor "primarily focused on the condition in the safe harbor relating to the ability of the annuity provider to make all future payments under the annuity contract."

A Busy Year

The DOL will be busy this year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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