The Department of Labor’s RFI

The U.S. Department of Labor recently released a Request for Information (RFI) regarding its Fiduciary Rule. According to the Department, this RFI “seeks public input that could form the basis of new exemptions or changes/revisions to the rule and PTEs.” They are further asking advice on whether or not the original January 1, 2018 applicability date should be postponed, and in the event of delayed applicability, they have also asked for an estimated “time expected to be required” for viable, long-term solutions to the new fiduciary guidelines.

The RFI listed “clean shares” as one of the best, long-term solutions “to the problem of mitigating conflicts of interest with respect to mutual funds.” However, funds will need more time to develop clean shares than is allowed by the Jan. 1, 2018 deadline for full compliance, hence the need for a new estimated compliance timeline.

The Department also listed fee-based annuities as a viable option for Fiduciary Rule compliance. In light of these innovative solutions, the Department would further like to know if “it would be appropriate to adopt an additional more streamlined exemption or other rule change for advisers committed to taking new approaches like those [listed above].”

In addition to these general commentaries on the transition period thus far, the DOL also listed over a dozen questions, including:

  • “Would a delay in the January 1, 2018 applicability date of the provisions…reduce burdens on financial service providers and… [allow] more efficient implementation…What costs and benefits would be associated with such a delay?”
      • “What has the regulated community done to comply…? Are there market innovations that the Department should be aware of beyond those discussed herein that should be considered in making changes to the Rule?”
      • Questions relating to the cost and efficiency of clean shares, including “How long is it anticipated to take for mutual fund providers to develop clean shares and for distributing Financial Institutions to offer them…?”
      • Question 9 seeks information of other streamlined approaches to the Fiduciary Rule outside of clean shares, T-shares, and fee-based annuities
      • “Are there ways in which the Principal Transactions Exemption could be revised or expanded to better serve investor interests and provide market flexibility? If so, how?”
      • “…To what extent would the ongoing availability of PTE 84-24 for specified annuity products, such as fixed indexed annuities, give these products a competitive advantage vis-a-vis other products covered only by the BIC Exemption, such as mutual fund shares?”
  • “To the extent changes would be helpful, what are the changes and what are the issues best addressed by changes to the Rule or by providing additional relief through a prohibited transaction exemption?”

Responses to these questions are due soon; responses regarding a delay of the January 1, 2108 date must be submitted on or before 15 days after the RFI is officially published in the Federal Register. All other responses must be submitted on or before 30 days after the RFI’s release in the Federal Register.

Nevada’s New Fiduciary Standard

As discussed in a previous article, the Department of Labor’s Fiduciary rule, which went in to effect on June 9, could have its final applicability date pushed back beyond January 1, 2018 to allow firms more time to come up with more cost-efficient, long-term solutions. However, despite the urgings of some to delay the final applicability date, certain states are beginning to take measures to implement new regulations that will bring the guidelines of the transition period more in line with those of the full-applicability period. Heading this movement is Nevada, who, on March 20, introduced Senate Bill 383, which was signed in to law on June 2 and is set to take effect on July 1.

This bill will revise the Nevada Securities Act, and will grant the Nevada securities administrator greater authority in defining the fiduciary duty by defining certain acts as violations or exclusions from the duty. Furthermore, under this law, investors will now have the right to sue financial planners for any “economic loss and all costs of litigation and attorney’s fees” that may result from a financial planner neglecting to act as a fiduciary, or by violating the Nevada law in any way by “recommending the investment or service. ” This bill not only broadens the definition of a fiduciary, but also gives a set definition of a financial planner as someone who: “for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions.”

Nevada is making great strides in fortifying its financial law, as well as in its compliance with the DOL’s new Fiduciary Rule. Although there are still some groups that are demanding delayed full-implementation of the law, there are several other states, including New York and California, that are moving closer in the direction of Nevada and would like to receive full implementation sooner rather than later.

For further information on this law, go to:

A Look at The New Fiduciary Rule’s First Month

The Department of Labor’s Fiduciary Rule went in to effect less than a month ago, and already new concerns surrounding it are arising. The first of these is the struggle of the SEC and DOL to come to an agreement on the technical definition of a “fiduciary.” For the law to go in full effect on its set January 1, 2018 applicability date, these organizations must come to a mutual decision on the definition of fiduciary and standard of care sometime before December 31. Coming to this agreement before the set date is turning out to be increasingly impossible. It is the opinion of Fred Reish of Drinker Biddle 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.”[1] In the meantime, all the transition period regulations of the Fiduciary Rule will remain in place.

Although the full standards set by the regulation will not be in place until January 1, 2018 at the earliest, there are still some important things to remember in the meantime. Primarily, among these is a message to employers; even if you have entrusted your plan oversight to an insurance provider, payroll company, or other TPA, you could still be held liable by the DOL for any non-fiduciary actions. This is because some record-keepers and TPAs have claimed that they are not Fiduciaries, and that for a company’s plan to satisfy the Fiduciary Rule, plan owners must obtain a third-party fiduciary service provider to stay compliant with the new law. Doing so will simply add another layer of unnecessary fees. So, as a plan owner, it is important to understand the exact role your TPA is playing in the management of your plan, and to make sure that you are not being charged excessive fees. But, primarily, you should make sure that your TPA is, in fact, also acting as your plan fiduciary so that you will not personally be held liable by the DOL for not complying with the new fiduciary standard.

Although some groups (such as record-keepers and other TPAs) are trying avoiding the new fiduciary responsibility, other previously non-fiduciary employees could now be considered a fiduciary under the DOL’s new regulations. Largest among these are fund managers, who will now be considered fiduciaries with respect to activities that occur before an investment takes place due to the communications required for that investment to be made. Since these communications, in some circumstances, can rise to the level of a “recommendation” under the final DOL regulation, the fund manager will be considered a fiduciary in certain scenarios, and should act as such to prevent liability. To help fund managers avoid said liability, as well as help guide them in showing their good faith compliance with the final regulation, Winstead recently released an article laying out some helpful steps in plan compliance:

  • “Revise private placement memorandums and subscription documents to incorporate statements disclaiming the provision of investment advice to benefit plan investors;
  • Adopt universal policies regarding permissible marketing and promotional activities; and
  • Require written representations of independent fiduciaries to satisfy regulatory exemption.”[2]


[1] Reish, Fred. Interesting Angles on the DOL’s Fiduciary Rule #52.

[2] With the tip of a hat, a fund manager can be an ERISA fiduciary.

Supreme Court Helps to Clarify Definition of ERISA “Church Plans”

The Employee Retirement Income Security Act (ERISA) was signed in to law in 1974 and was designed to protect the beneficiaries of retirement plans. However, due its strict funding rules and required fees for the PBGC (Pension Benefit Guaranty Corporation), certain plans are given exclusion from ERISA to help them save money. There are several groups that have been provided these exclusions, one of which is church organizations. Originally only churches themselves fell under this category, but eventually Congress felt the need to expand on this definition, so in 1980 they made an amendment to ERISA. From this point on, a “church plan” has been defined as:

  • A plan established and maintained for its employees (or their beneficiaries) by a church or by a convention or association of churches includes a plan maintained by an organization, whether a civil law corporation or otherwise, the principal purpose or function of which is the administration or funding of a plan or program for the provision of retirement benefits or welfare benefits, or both, for the employees of a church or a convention or association of churches, if such organization is controlled by or associated with a church or convention or association of churches.. 1002(33)(C)(i)

However, there is some ambiguity in this definition that has led to controversy on exactly how it should be interpreted. These controversies came to an end as a result of the recent Supreme Court case of Advocate Health Care Network et al. v. Stapleton et al.

The final Supreme Court ruling for this case took place on June 5, 2017.  The Defendants’ argument was unanimously upheld, stating that “a non-church—such as a church-affiliated hospital or school—may establish a church plan so long as the plan is maintained by an organization qualifying under section 3(33)(C)(i) that is controlled by or associated with a church.” Considering that this definition had already been used by the U.S. Department of Labor (DOL), Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC) for over 30 years, this ruling came as a relief to plan sponsors who had already been operating under this definition.

Although this was a huge win for plan sponsors who have “avoided millions of dollars in penalties, attorney fees, back fees, and PBGC premiums,” (Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations), it may leave the retirement of thousands in jeopardy. Participants in these plans are less secure in their retirement because ERISA’s funding, vesting, and fiduciary requirements will not apply to them. This could potentially end in hospital employees spending their entire careers contributing to pension plans that will be insolvent by the time they retire. This is not the only problem people are having with the court’s ruling.

Of the arguments against the ruling, the most popular is that it is unfair to secular organizations that have to compete with non-ERISA church affiliated organizations, despite the fact that these “church-affiliated” organizations run more like a secular ones. According to Justice Sotomayer, “Church-affiliated organizations operate for-profit subsidiaries, employee thousands of people, earn billions of dollars in revenue, and compete with companies that have to comply with ERISA.” Many have argued that this gives an unfair and undue edge to church-affiliated hospitals over the non-church-affiliated ones.

For these and several other reasons, this will almost certainly not be the end of legislation concerning ERISA church-affiliated plans. Not only is there disagreement over the fairness of the ruling as a whole, but the Court has also left many questions unanswered, such as: “What exactly constitutes a ‘principle purpose organization’ that may attain a church plan?”; “What does it mean to be ‘controlled by’ or ‘associated with’ a church?”; and “Exactly how close must the connection between hospitals and the church be?” The Court may have clarified the general definition of “church plans” to some extent, but the exact guidelines as to what qualifies as a “church-affiliated organization” may not be as clear as hoped. Stay tuned for updates on this ongoing discussion.


For further reading:

Religious Institution Client Alert, June 2017: U.S. Supreme Court Interprets ERISA Church Plan Exemption In Favor of Religious Charities:

Unanimous Supreme Court Decision In Favor of “Church Plan” Defendants:

Every word matters: Supreme Court finds “church plans” include those established by church-affiliated organizations:

Proposed Changes to Cost of Living Adjustments Could Mean a Major Win for PBGC

The employee retirement landscape continues to evolve as private companies are providing less compensation in the form of retirement benefits. This shift away from defined benefit programs and cost-of-living adjustments for annuities is part of that evolution. By comparison, the Federal Government continues to offer a very generous package of retirement benefits consistent with the goal of reining in Federal Government spending in many areas, as well as to bring Federal retirement benefits more in line with the private sector

 –Budget of the U.S. Government, Fiscal Year 2018

In their efforts to reduce spending, and to line up Federal retirement benefits “with the private sector,” the White House has proposed eliminating its cost-of-living adjustment (COLA) employees covered by the federal employees retirement system (FERS), a change that is estimated to save over half a billion dollars in just the next fiscal year. Although this budget would eliminate COLAs for future retirees, current retirees would be mostly protected, only having their COLAs cut by 0.5%.

This budget also requires FERS members to contribute a minimum of 1% to their annuities for six years, in addition to adjustments being made to the way in which retirement benefits are calculated for FERS-covered employees. Lastly, this budget would eliminate “the supplement for employees who retire younger than age 62, when Social Security eligibility begins,” (Trump’s Budget Would Drain Federal Workers’ COLAs). However, despite the seemingly harsh cuts to federal retirement benefits, according to the Congressional Budget Office (CBO) federal employees will still be receiving benefits far more generous than those offered by the private sector, so there is no real reason to suspect that these changes will hamper the Government’s recruiting and retention efforts.

Although this proposal may seem like a loss for federal employees, it is a definite win for the Pension Benefit Guaranty Corporation (PBGC). According to ASPPA’s article, FY ’18 Would Raise Fresh Revenue for the PBGC, this budget would:

  • “make changes to PBGC premiums that would raise $21 billion;
  • Accelerate the plan year 2027 payment date for both single and multiemployer premiums by one month while reversing a prior change in the payment date for plan year 2025 premiums;
  • Provide that none of the funds available to the PBGC for fiscal year 2018 shall be available for obligations for administrative expenses in excess of $424,417,000; and
  • Allow no more than $98,500,000 through Sept. 30, 2022, for costs associated with the acquisition, occupancy, and related costs of headquarters space.”

And, this budget would also make adjustments to PBGC premiums that would raise an additional $16 billion over the budget window, and would be able to fund the multiemployer program for the next 20 years (ASPPA, FY ’18 Would Raise Fresh Revenue for the PBGC). When lumped together, these changes spell out massive savings and revenue for the PBGC.

However, with its many proposed budget cuts and revenue adjustments, the Budget remains a highly controversial topic in D.C. We still have yet to see whether or not it will be supported in Congress, where both House and Senate members are being pressured by federal employee unions and other constituent groups to shut it down. All there is to do now is sit back and see what D.C. decides next.


For further reading:

Trump’s Budget Would Drain Federal Workers’ COLAs

FY ’18 Budget Would Raise Fresh Revenue for the PBGC:

The New Fiduciary Rule’s Important Take Aways

On April 7, 2017, just three days before the original set applicability date, the Department of Labor announced they will be postponing the applicability dates originally stated in the Fiduciary Rule from April 10, 2017 to June 9, 2017, and certain provisions in the exemptions will be further delayed until January 1, 2018.

Under this new rule, any individual who offers investment advice for a fee or any other form of compensation (whether it be direct or indirect) will be considered a fiduciary. They are therefore required to act only in the best interest of the recipient of their advice, with no regard to their own interests. In other words, almost any insurance or investment recommendation to a plan, participant, or IRA will now be a fiduciary act, and is therefore required to work in the best financial interests of a plan and its participants.

As wonderful as this sounds, it will prove to be a big transition for many firms. This is why the Department has allowed for a transition period lasting from June 9, 2017 – January 1, 2018. During this time fiduciaries must simply comply with the Impartial Conduct Standards (ICS) defined by the DOL (outlined below):

The standards specifically require advisers and financial institutions to:

  • Give advice that is in the “best interest” of the retirement investor. This best interest standard has two chief components: prudence and loyalty:
    • Under the prudence standard, the advice must meet a professional standard of care as specified in the text of the exemption;
    • Under the loyalty standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm;
  • Charge no more than reasonable compensation
  • Make no misleading statements about investment transactions, compensation, and conflicts of interest. [1]

The applicability of all other 2016 amendments will be delayed until January 1, 2018.

As for the implementation of the Rule during the transition, rather than imposing strict penalties and citing violations, the Department has chosen to take the stance of an assistant. According to the Department, they will not pursue claims against any fiduciary who is “working diligently and in good faith to comply with the fiduciary duty rule and exemptions.” They have also asked the IRS to not apply the §4975 or related reporting obligations to any transaction or agreement where the Labor Department’s temporary enforcement would apply. That said, if the fiduciary fails to make these diligent and good-faith efforts to comply with the Rule, then he/she will lose the benefit of the temporary non-enforcement policy.

Even though the Rule will be put in to action in a week, there is still some potential for further changes to be added during the transition period. According to the Department, the “review of the Fiduciary Rule and exemptions is ongoing…[and] based on the results of the examination…additional changes will be proposed.” In an effort to see what further changes might be necessary, a Request for Information (RFI) will soon be released to ask for public input on ideas for possible new exemptions or regulatory changes.

There is evidence to suggest that the results of the RFI could prompt the Department to not only make further changes to the rule, but also further delay the final implementation date of January 1, 2018. Now, you may be wondering why such a delay would be necessary; well, according to recent market developments, some of the most promising responses to the Fiduciary Rule (such as “clean shares”[2]) are likely to take more time to implement than originally thought when the Department set the January 1, 2018 date for full compliance. So, by allowing additional time firms have the opportunity to create compliance mechanisms that are less costly and more effective than the measures they might resort to if given less time. In other words, the Department wants to give firms enough time to create well-though-out and long-term solutions that will be better for plans and their participants in the long run.

Regardless of what the rule eventually morphs into, the key takeaway for trustees and plan sponsors is this: the Department has established a framework that, in principal, grants further protections if they hire investment fiduciaries. Compared to the suitability standard that dominated the marketplace prior to the DOL’s fiduciary rule, plan sponsors can now, in effect, delegate investment fiduciary duties to their investment advisor. However, the regulations are very clear that fiduciary duties can only be delegated to other fiduciaries. Non-fiduciary service providers who sell only “suitable” investments are not fiduciaries, and therefore cannot be expected to represent the best interest of the plan’s participants or trustees.

For further reading on this subject, check out:

Impartial Conduct Standard: More Than Meets the Eye – NAPA Net:

Steering Clear of Fiduciary Enforcement Troubles – NAPA Net:

Conflict of Interest FAQs (Transition Period) – U.S. Department of Labor:

Fiduciary Rule to Go Live June 9, 2017:

The Department of Labor Confirms June 9th as the Effective Date of the Fiduciary Rule: What Employers Need to Know Now:

[1] U.S. Department of Labor. Conflicts of Interest FAQs (Transition Period). May 2017. Accessed May 30, 2017.

[2] “Under this approach, the clean shares sold by the broker would not include any form of distribution-related payment to the broker. Instead, the financial institution could set its own commission levels uniformly across the different mutual funds that advisers may recommend, substantially insulating advisers from conflicts of interest among different mutual funds.”  – DOL Conflicts of Interest FAQs (Transition Period)

Employee Investment Outcomes and the New Fiduciary Standard

When Section 401(k) became a permanent provision of the Internal Revenue Code in 1980, a seismic shift occurred in American workers’ preparation for retirement. The responsibility for contribution and investment decisions shifted from employers to employees.

Before 1980, companies that offered a retirement plan were required to fund them. That meant that the employer alone bore the contribution and investment responsibilities.

In those defined benefit plans, if the investment returns were less than expected, then the employer’s funding obligation increased, to offset the shortfall on investment returns. The employer was tasked with achieving sustainable investment outcomes to support their employees throughout their retirement years.

With the introduction of 401(k) plans, contributions became the responsibility of the employee. Moreover, they have had to decide an adequate savings rate and become investment savvy.

Employee-directed Retirement Investment Falls Short

Employees have, overall, not been up to these tasks. This shift to a 401(k) retirement world thus ushered in an era in which employees were inadequately prepared to face the tasks at hand.

Early on, participants had no guidance on the how much they should be saving for retirement or how those funds should be invested.

The Department of Labor has created numerous regulations over the past 36 years to ensure employees have the information and resources needed to make informed and educated decisions about their retirement savings.

Not surprisingly, insurance companies and financial services firms jumped into the void of information, and developed slide rules, websites, online calculators, glide path funds, target date funds, custom QDIAs, and a plethora of other tools and products to serve the fledging 401(k) investor.

The outcome of these endeavors has been disappointing, to say the least.  With the first generation of 401(k) participants approaching retirement, the reality of inadequate preparation of is beginning to set in.

Retirement Unpreparedness Meets New Fiduciary Duties

The average account balance for the typical participant lies far below the threshold needed for a sustainable retirement income. The education, tools, and resources provided by employers, their advisors, and the industry have left many ill-prepared for retirement. This void is being addressed by longer working careers, government intervention, and an opportunistic legal system. [is this common knowledge in the industry? If not, spell out what are you referring to here re the legal system]

Public school systems have been sued over failed outcomes by their students, but the courts have been reluctant to rule in favor of the parents and students in such cases. The potential liability would not be in the best interest of school systems and the public good.

While a standard of care is mandated by law and periodic achievement test can demonstrate some level of proficiency in the public education system, it is doubtful the 401(k) industry will be afforded the same latitude.

Against this background, we have the passage of the new fiduciary rule for investment advisors. It elevates the standard of care investment advisors must use to the highest level. No longer should the products and services simply be suitable; they must also be in the best interest of plan participants.

“In the best interest of plan participants” implies a quantifiable outcome. To protect themselves, and help their employees make wiser investment and saving decisions, employers would be well served to quantify the progress participants are making toward retirement.

Education alone is not enough. Tools and resources alone are not enough.

The new fiduciary rule is only the beginning of accountability standards employers and service providers can expect in the future. Plan sponsors need to ensure that they have appropriate, quantifiable measures in place, so they can demonstrate that participants have a path to achieving retirement readiness.

Defining and achieving sustainable outcomes mitigates the employer’s liability while improving productivity and employee morale.

The New Fiduciary Rule—Advisors Who Only Educate Might Put Plans at Risk

At a recent 401(k) summit in Nashville, I was surprised to hear the number of advisors who said they are considering offering only education to participants, so they do not have to comply with the new fiduciary rule.

As many now know, under the new fiduciary rule announced by the Department of Labor, anyone who provides investment advice and receives a fee will be subjected to the more stringent, fiduciary standard of care. The fiduciary standard of care requires that all decisions and actions that affect a participant’s account balance be in the best interest of the plan’s participants.

In contrast, education activities will continue to operate under an exemption to the new rule.  But advisors who merely educate participants about investment choices and strategies are potentially missing the mark on preparing participants for retirement.

Plan Sponsors Could Inadvertently Breach Fiduciary Duty

As the plan sponsor, you are the gatekeeper of the plan’s assets. It is your responsibility to select, monitor, and hold accountable any and all service providers who are paid from plan assets. Simply allowing the advisor now to be considered an “educator,” without a basis for measuring results, is potentially a fiduciary breach for which the fiduciary can be held personally liable.

Advisors are reluctant to take on the personal liability of acting as a fiduciary. Providing only education, rather than advice, may be an out for them. But it may not be the same out for plan sponsors.

The plan’s act of selecting an educator could be a fiduciary act, which requires diligence and care. True, participant education is not considered advice under the rule. But if the education is funded from plan assets, the best practice is to determine what’s in the best interest of plan participants.

Tools for Assessing Educator Effectiveness

Identifying the expected or desired outcome from any endeavor establishes a basis for evaluating the progress toward the stated goal. Education is no different.

A decision matrix could be instrumental in providing an organized structure and procedural process to determine an expected outcome. Such a matrix might evaluate:

  • What’s the purpose of participant education, and what is the desired outcome?
  • What problem is it intended to solve?
  • What scoring method will be used to define a successful outcome?
  • How many providers will be evaluated before finalizing the selection?

A starting point for plan sponsors is to conduct a survey of all eligible participants to see if they feel they are on track for retirement. A number of organizations publish national results each year, so benchmarking your participants to a national study can identify potential areas for improvement.

National surveys may be somewhat qualitative. For a quantitative approach, instead calculate the current average replacement ratio of all participants. Other key information to gather includes identifying a baseline of how the participants feel toward retirement readiness, and a quantifiable replacement ratio. From there, plans can build out a decision matrix to determine the effectiveness of current and future endeavors.

The desired outcome is not just a higher participation rate, but rather a greater sense of retirement security and higher average income replacement ratio.