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ARA Crafts New Levelized Fee Exemption in RFI Response

In a July 18 letter responding to the Labor Department’s request for information (RFI) on its fiduciary regulation, the American Retirement Association (ARA) has requested an extension of the applicability date – and a streamlined levelized fee exemption.

Level ‘Better’

The ARA had authored – and championed – the notion of a “Level-to-Level” Exemption in its July 20, 2015 and Sept. 23, 2015 comment letters on the proposed fiduciary rule. In its RFI response, the ARA noted that, “while the Level Fee Fiduciary rules addressed a number of concerns, the following significant concerns continue to be a challenge for Financial Institutions and Retirement Investors,” going on to note that the Best Interest Contract Exemption (BICE):

  • Does not recognize offsetting arrangements as consistent with being “level,” even though the preamble to the final fiduciary rule acknowledged that existing interpretations and advisory opinions, such as that in the Frost National Bank Advisory Opinion, remained in effect.

  • Would benefit from a clarification that offsets, fee rebating and similar approaches, which are far more common in the retirement marketplace than an “all in” flat dollar or basis point fee, are, in fact, covered under the levelized fee exemption.

  • Needs to address situations that can arise from circumstances where financial institutions and their advisers who are not all subject to the same regulatory standards may not be able to charge a fixed assets under management fee.

  • Doesn’t address the unavailability of the existing Level Fee Fiduciary rules when fees vary across investments (that could require higher levels of specialized expertise and levels of service that would justify higher costs for the investment).

Alternative Levelized Fee Exemption Components

The alternative levelized fee exemption proposed by the ARA would have four components:

  1. Incorporates Impartial Conduct Standards.

  2. A Level Fee – defined as one provided on the basis of a fixed percentage of the value of the assets or a set fee that does not vary on the basis of a particular investment recommended, determined within each type of investment. For example, annuities, mutual funds, CITs and ETFs, and fixed income investments would each constitute a separate type of investment.

  3. Disclosure of Compensation. With respect to plans subject to ERISA, the Levelized Fee Exemption’s disclosure requirements would be deemed satisfied if a retirement investor is provided the disclosures required by ERISA section 408(b)(2). Similar rules would apply to non-ERISA accounts.

  4. Special Rules for Investments Protective of Retirement Investors, such as self-directed brokerage arrangements, cash or money market funds, and company stock, where there are no improper incentives that would encourage an adviser to use those investments, and where there is no revenue-sharing or significant fees to incent their recommendation.

The ARA response also includes proposed exemption language.

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Delay Gains

While the applicability date for much of the BICE was delayed until Jan. 1, 2018, in the comment letter the ARA recommends that the 2018 applicability date for the full BICE be extended until the later of either:

  • 6 months after the delayed guidance finally becomes applicable in its entirety; or

  • 6 months after the date that any supplemental prohibited transaction guidance issued by the Department becomes applicable.

According to the ARA, this delay would have a number of benefits, including:

  • Providing more time for the marketplace to create new products and to develop streamlined exemption solutions that would mitigate concerns about compliance with the final fiduciary rule.

  • Forestalling a potential second wave of complex communications that would add significant burdens and costs ultimately to be borne by retirement investors.

  • Avoiding the need for financial institutions to invest significant resources over the next 5 months to prepare for the 2018 applicability date that would then require retirement investors, consistent with their fiduciary duties, to invest significant resources to evaluate and act on financial institution communications about their decisions.

Regarding concerns about the cost of delaying the applicability date, the ARA comments that the Labor Department would still be able to continue its active enforcement program, and if a financial institution acts in bad faith, the Labor Department could pursue enforcement consistent with the position outlined in Field Assistance Bulletin 2017-02.