The American Retirement Association (ARA) is calling on the Department of Labor (DOL) to make changes to its proposed amendments to the QPAM exemption, arguing that, as currently drafted, the proposal would needlessly disrupt plan relationships and increase costs.
Testifying Nov. 17 before the DOL’s Employee Benefits Security Administration for a hearing on the proposed changes, ARA General Counsel Allison Wielobob urged the department to keep the impacts on plan sponsors and participants top of mind as it works on the QPAM Exemption.
“We are concerned that the Proposal would make it harder for many plans and participants to have access to professional asset management. If being a QPAM becomes too onerous, many asset managers may not offer the QPAM services,” Wielobob told the DOL.
The DOL on July 26 released the proposed amendment to Prohibited Transaction Class Exemption 84–14—also known as the Qualified Professional Asset Manager (QPAM) Exemption. The QPAM exemption permits various parties who are related to plans to engage in transactions involving plan and individual retirement account assets if the assets are managed by QPAMs that are independent of the parties in interest and that meet specified financial standards.
The changes would, among other things, expand the types of misconduct that disqualify plan asset managers from using the exemption and would clarify that foreign convictions disqualify firms from utilizing the QPAM.
Wielobob explained that the ARA shares the DOL’s objective and supports conditions for prohibited transaction relief that provide necessary protections to plans, as well as clarity to the investment selection and management process—without unduly disrupting and interfering with business relationships that otherwise function well.
To that end, in building off the ARA’s Oct. 11 comment letter, the ARA General Counsel outlined three specific recommendations for the DOL to consider.
Exclusive Authority Requirement
The ARA’s first recommendation addresses concerns over the involvement of investment decisions by parties in interest to a transaction—what some are calling the Exclusive Authority Requirement. Wielobob testified that the ARA believes this condition should be modified so that it does not preclude routine business interactions.
The ARA understands this may be intended, in part, to address situations where it appears that a QPAM is brought in to approve an already‐negotiated transaction and is therefore not acting as in an independent fiduciary role in the particular transaction, she explained.
The DOL—in seeking to ensure that a QPAM has sole responsibility for the terms of a transaction and any associated negotiations—would alter the exemption such that any transaction—whether planned, negotiated or initiated by a party in interest in whole or in part—would not meet the conditions for exemptive relief.
“Our view is that it should not matter whether a party‐in‐interest, for example, a plan sponsor, identifies a potential transaction if final approval and the terms of the transaction are negotiated by and are the ultimate responsibility of a QPAM—the QPAM determines whether the transaction goes forward and on what terms,” Wielobob told the DOL.
Moreover, it is common practice for plans sponsors and other plan fiduciaries to identify or present investment opportunities to a QPAM, while still fully relying on and accepting the independence of the QPAM’s judgement for approval of a transaction, she explained. Indeed, it is easy to imagine that in some cases, it would be imprudent for a plan sponsor not to initiate a conversation about an investment, yet plan sponsors, in fact, have duties to bring suggestions, she further emphasized.
“In this way, the proposal is a blunt instrument that would prohibit a wide variety of routine/prudent interactions by precluding all involvement,” Wielobob observed, adding that the ARA believes that practices which preserve the QPAM’s “ultimate discretion” should be permitted.
The ARA further recommends that during the one‐year winding down period, the exemption should permit new transactions in existing accounts which may be required for a prudent winding down process.
Under the proposal, if a QPAM becomes ineligible to rely on the exemption, the plan can terminate the relationship over a one‐year winding‐down period—without penalties. The ARA is concerned, however, that the proposed winding-down period may only be used to transition existing clients out of existing investments, and that new transactions in existing accounts would not be permitted.
“This seems to raise the possibility of risks of violations of otherwise applicable fiduciary duties because the QPAM cannot enter new transactions, including transactions that might be required for prudent unwinding of existing transactions,” the ARA General Counsel explained.
Finally, the DOL should provide at least 18 months for affected parties to come into compliance with the conditions of an amended QPAM Exemption, the ARA recommended.
“We believe that it would be prohibitively difficult for plans to complete the required amendments in such a brief time frame, exacerbating problems resulting from the substance of the proposal,” Wielobob contended. “Some plan sponsors have management agreements with multiple QPAMs. The ARA believes that the extensive changes needed to bring QPAM agreements into compliance with the proposal require at least 18 months.”
Several other business groups, including the U.S. Chamber of Commerce, the American Benefits Council and American Bankers Association, testified in opposition to various aspects of the proposal.