North Pier Fiduciary PIERspective – Brant Griffin (October 19th, 2011)
DOL Withdraws Regulations to Change Fiduciary Rule
The DOL has withdrawn a proposed regulation that would have expanded the definition of fiduciary under ERISA § 3(21) after falling to pressure from Congressand Wall Street (and some believe the White House). The proposed regulations would have amended ERISA and expanded the conditions under which consultants, advisors and others who provide investment advice would be considered fiduciaries.
The current fiduciary standard was developed shortly after the passage of ERISA in 1974. 35 years later, today’s retirement plan landscape makes the current rules seem remarkably antiquated. Many organizations have historically evaded fiduciary responsibility to the the sponsor retirement plans and to the America’s workers that rely on them. By maintaining conflicted business practices that are not consistent with a fiduciary stance, the current regulatory framework can permit advisors to subordinate their client’s interest to their own financial gains when advising plan sponsors and their participants. The proposal’s goal was to ensure that potential conflicts of interest among advisers are not allowed to compromise the quality of their advice.
The promise of regulations to define a new fiduciary standard has caused quite a stir in the advisor community. Wall Street brokerage houses, large consulting organizations, advisory firms and other interested parties would be greatly affected by this new rule, causing many organizations to restructure their ERISA services or be consigned to a non-fiduciary role. In the 10 months since the proposed rules were issued, the DOL received numerous public comments and heard testimony from many interested parties attempting to alter the outcome of this plan. As pressure mounted, calls for a withdrawal of these regulations finally succeeded.
In explaining the DOLs grounds for the withdraw, EBSA Assistant Secretary Phyllis C. Borzi commented, “We have said all along that we will take the time to get this right to ensure that we provide the strongest possible protections to business owners and retirement savers in plans and IRAs.” Secretary Borzi went on the say, “Investment advisers shouldn’t be able to steer retirees, workers, small businesses and others into investments that benefit the advisers at the expense of their clients. The consumer’s retirement security must come first.”
An area of controversy has been the application of these regulations on IRA accounts. DOL representatives have made it clear that IRA protections will be included in the new proposed regulations. The regulations will also address concerns on routine appraisals (such as for ESOPs) and certain commercial transactions, as performed in the management of stable value investments.
Critics of the initial proposal regarding IRA accounts allege that the proposed regulations would have subjected IRA brokers to a fiduciary duty when they are merely playing a sales role. Opponents further claim these new rules would reduce commissions, increase compliance costs and even force some broker-dealers out of the market. To date, the DOL has rejected these claims, and appears ready to address these concerns. If included in the final regulations, these changes will ultimately serve to clean up many of the questionable business practices that plague the servicing of the IRA market.
The DOL has stated a new version of the proposed regulations will be issued by early 2012. If the revised version is found to be a watered down rendering of its predecessor, this withdraw may prove to be a victory for those interested parties those who fiercely objected to them.
Regardless of this setback, plan sponsors are advised to be keenly aware on the distinctions that exist in the advisor arena. Properly exercised due diligence on the fiduciary role of their advice providers should yield a clear, accountable, higher value service – free from tainted advice. Mandated provider disclosures from the upcoming 408(b)(2) regulations (effective March 31, 2012) should make such due diligence easier.
Perhaps the best way to sum up the current marketplace for fiduciary services is by a revealing comment made by the EBSA’s Michael Davis, when he said, “I see a very short line of people in front of our building saying they want to be a fiduciary.” The simple truth of this statement ensures further battles to come. Today’s battle may have been lost, but the war wages on.
Legal Update: Appellate Court Rejects Allegations of Excessive Plan Fees
The last several years have seen heightened activity of ERISA suits stemming from investment related claims in defined contribution plans. In Loomis v. Exelon, the US Court of Appeals for the Seventh Circuit has ruled in favor of the defendants, marking a noteworthy decision for plan sponsors. Exelon Corporation’s (Exelon) employees argued that the company breached its fiduciary duties by providing investment options with excessive fees in its defined contribution plan.
Exelon’s plan offered 32 investments, 24 of them were mutual funds which were open to the public with expense ratios ranging from 0.03% to 0.96%. The plaintiffs asserted that the plan administrators violated their fiduciary duties by offering retail mutual funds when they should have offered lower cost options (such as institutional funds). The plaintiffs also claimed that requiring participants to absorb the costs of the plan’s funds rather than having the plan cover the costs, was in violation of the plan administrator’s fiduciary duty.
The plaintiffs’ arguments were not persuasive to the court. The court remarked that the same investments were offered in the retail marketplace and therefore their expense ratios were established to be competitive when measured against other fund alternatives. The court also noted that participants were given a wide range of investment choices from which to invest. Additionally, literature and education seminars were provided to inform plan participants on how their investment choices differed, including how to identify low cost alternatives.
The Seventh Circuit ultimately decided that there was no evidence to suggest that Exelon benefited from the funds at the expense of its plan participants. Exelon had every reason to choose the most cost effective funds in order to drive down participant expenses, as this would have resulted in better overall plan performance. Furthermore, the court remarked that there is nothing in ERISA that requires a fiduciary to look for the cheapest funds in the market.
It was also cited by the court that a prior U.S. Supreme Court case found that ERISA does not impose a duty on employers to contribute to employee benefit plans at a certain level. In determining its plan cost payment levels, employers “may act in their own interests.” Regarding the plaintiffs’ arguments that Exelon should have contributed more to the participants’ accounts by covering mutual fund expenses, the court ruled that ERISA did not support this claim.
It is important to note that the Loomis decision may be inconsistent with another well known district court decision in 2010, Tibble v. Edison International (appeal pending). In Tibble, the court held that Edison was in violation of ERISA’s fiduciary duty of prudence with the plan’s selection of certain retail mutual fund investment options. The court found that by not negotiating economies of scale discounts on behalf of the plan, or offering the option of less expensive “institutional” funds, the administrator violated its fiduciary duty. It will be interesting to see how the Ninth Circuit ultimately rules on Tibble.
Social Security COLA Increase Likely Rise projected at 3 percent or more
After two years without an increase, Social Security recipients appear likely to receive a cost-of-living adjustment (COLA) in 2012 reaching as high as a 3.5 % increase. Tens of millions of Social Security recipients across the US have not seen their benefits increase since January 2009, when beneficiaries received an adjustment of 5.8% due to rising energy prices. Given the general increase in the cost of goods, a COLA will be a welcome change for more than 58 million Social Security beneficiaries.
COLAs are based on overall average price indexes throughout the year and usually remain in line with inflation. The Bureau of Labor Statistics is responsible for the data. COLA adjustments are determined by comparing the third-quarter consumer price index with the previous year’s third quarter. If September’s index remains unchanged from August, then recipients can look for a 3.5 % increase in 2012.