If you’re renowned ERISA attorney Fred Reish, the second quarter of the year was largely a carryover from the first, with some interesting twists from the Labor Department’s fiduciary proposal.
In a recent blog post, Reish explains that the hot issues in the second quarter were: the prospect of the DOL’s fiduciary proposal, allocation of revenue sharing in 401(k) plans and capturing of rollovers from retirement plans, although two of those issues merged — it turns out the hottest issue in the fiduciary proposal were distributions from retirement plans and the capturing of rollovers.
For Reish, publication of the proposal and a July 21 deadline for comments meant that his work shifted from education to the preparation of comment letters, work that he notes generally fell into three categories:
- Requests for clarifying and limiting the definition of fiduciary advice. Reish explains that the proposal says that a recommendation specifically directed to a person could be fiduciary advice, which at least in theory could be a general mailing to thousands of people, but with each letter having a specific addressee. Now while he notes that he can’t imagine that the DOL intends for it to be that broad, he thinks it will likely be limited or at least clarified so that it only includes specific, rather than general, recommendations. “There will likely be some changes to the fiduciary definition, but the final version will probably be much the same as the proposal. So, expect most sales practices to fall under the fiduciary advice definition,” he notes.
- Requests to clarify PTE 84-24. Reish explains that this Prohibited Transaction Exemption applies to insurance products that are sold to plans and IRAs (other than individual variable annuities that are sold to IRAs, which are under the rule’s new Best Interest Contract Exemption), and while he thinks the DOL will probably modify and clarify PTE 84-24, he thinks it is unlikely that major changes will be made to it.
- Comments requesting material changes to the Best Interest Contract Exemption. On this issue, Reish thinks the DOL is likely to make “significant concessions” in its rewrite and finalization of this exemption, particularly regarding financial disclosures. However, he notes that the BIC only applies to certain transparent and/or highly regulated investments, such as mutual funds, bank deposits and insurance contracts, and thus he says that sales of other investments, such as private equity funds and hedge funds, “do not have an exemption and, thus, can only be recommended where compensation to the adviser, the adviser’s financial institution, and all affiliated entities is level” — a result that he says “virtually eliminates recommendations of proprietary products of those types.”
On the topic of revenue sharing, Reish notes that the current issue is whether or not it should be “levelized” or “equalized.” He says the fundamental question is whether it is fair, or even prudent, for some participants to be invested in high expense funds that pay revenue sharing, while others are lower expense fund that do not pay revenue sharing . . . and the cost of the plan is either entirely or largely borne by the revenue sharing.
However, that is a question to which this blog post provides no answer.
