Speaking July 25 at the 2023 NAPA D.C. Fly-In Forum, the Principal Deputy Assistant Secretary for the DOL’s Employee Benefits Security Administration (EBSA) shared with delegates the key priorities of the department, including new guidance on SECURE 2.0, an update to the fiduciary rule, and cybersecurity.
In a “fireside chat” format with American Retirement Association CEO Brian Graff, Ali Khawar, who serves as the Principal Deputy Assistant Secretary at EBSA, explained that, even before the SECURE 2.0 Act was signed into law, the DOL started reviewing the provisions and identifying priority areas they would need to work on first.
ESOP Initiative
Among those is the Worker Ownership, Readiness, and Knowledge (WORK) Act contained in the legislation to establish an Employee Ownership Initiative within DOL to promote employee ownership. The provision authorizes a $50 million grant program to help establish and expand employee ownership centers across the country. It also requires DOL to issue formal guidance on employee stock ownership plan (ESOPs) valuation standards.
Graff pointed out that the DOL, historically, has had some concerns about ESOPs and asked Khawar how he views the legislation and whether the department’s view has evolved with respect to ESOPs.
One part that’s central to a lot of the action in the DOL’s enforcement program has been whether an ESOP is paying the right amount for what it's getting, which is at the heart of the problem, Khawar explained. “I am hopeful that the additional guidance clarifies the rules of the road for everyone and puts us in a situation where enforcement becomes less necessary, because kind of by default, the behavior and the actions and conduct we're seeing are more in line with what our expectations are,” Khawar noted, adding that he believes the project is quite important.
“We're moving towards a policy focus and agenda where ESOPs are going to be prioritized in a way with the government essentially saying, ‘we think this is a good idea done properly. And we think employers as well as their consultants should be thinking about and considering it,” Graff observed as part of the discussion.
To that end, Khawar stressed that EBSA’s work typically has focused more on the financial transaction side of it, while the initiative is focused on the ESOP structure under ERISA. “In my mind, the best-run ESOPs are the ones that are combining not just the kind of legal ownership, but also the things that make ESOPs very attractive.”
Reporting and Disclosure
An additional priority is the reporting and disclosure provisions contained in SECURE 2.0, which Khawar shared that they are thinking about from a “holistic standpoint.” There’s currently a Request for Information pending at the Office of Management and Budget that will be the first step in gathering public input before moving forward with formal rulemaking on any of the provisions, he noted.
In this regard, one of the things the DOL will be thinking about is how to fashion the required disclosures so that participants not only read, but also understand and act on the information. Consequently, the DOL is approaching the project not just from a legal compliance standpoint but also from one that focuses on better communications for participants.
Missing Participants and Lost and Found
Another piece that is part of SECURE 2.0 puzzle, but one that will likely have a longer timeframe for implementation, is the issue of missing participants and the lost and found database.
Khawar explained that the longer lead time comes partially from having to build a system, which he noted they are working on now. “One of the things that we are pretty actively working on is trying to make sure that we can get access to internal government data. … To the extent that we can leverage the ways that people are reporting right now is our preference, rather than create a whole new reporting obligation to the government that will be, to a certain extent, duplicative of what folks are already doing.”
Graff observed that, from a plan sponsor and plan advisor perspective, there continues to be frustration on the issue of missing participants, as it comes up in the context of enforcement action audits. What's more, he added, it's still not clear to plan sponsors and their fiduciary advisors exactly what they're supposed to be doing when they're faced with missing participants. As such, Graff pondered whether the DOL could tie possible missing participant guidance with the lost and found database.
In response, Khawar explained that missing participants and the lost and found pieces are somewhat linked with the work they began a number of years ago on auto portability and the individual exemption provided to the Retirement Clearinghouse, which, he noted, is aimed at preventing people from becoming lost in the first place. “The concept is that, as you move from company to company, we would actually, for the first time, do what other countries have managed to successfully do, which is not have people get lost. The money moves to your new 401(k). It is an idea that I think is attractive to a lot of people, and that's part of why it ended up in SECURE 2.0.”
Emergency Savings
From there, Graff and Khawar turned to the issue of emergency savings and pension-linked emergency savings accounts contained in SECURE 2.0. In discussing the importance of having access to a retirement savings account, Khawar observed that there is real concern among many people who don’t save for retirement because they’re worried about locking up their money.
“If you're struggling to balance your household budget, the idea that someone's going to take five or 10% of your salary away from you and say it's going to be a nest egg for a later date, that's a hard decision for you to make,” the Deputy Assistant Secretary explained. “And we can all agree that retirement savings is a good thing to do from a financial standpoint, but we need to think about these individuals holistically and ask from a household basis, is that going to be the best decision for them?”
Khawar added that he believes emergency savings can really strike at the issue, since it can encourage savings, but also can address the fear of not being to access their funds if a person’s car breaks down.
Fiduciary Rulemaking
Turning to fiduciary rulemaking, Graff inquired what plans the DOL has for updating the ERISA 404 regulations. While Khawar noted that he was unable to comment on the specifics of any such forthcoming rule, he shared that he believes the biggest part of the problem with rollovers had been addressed in PTE 2020-02, but added that there are still issues the DOL wants to address.
Ultimately, he explained, the approach taken by the Obama administration was struck down by the Fifth Circuit in the Trump administration, but the problem didn't go away, and so the Trump administration adopted PTE 2020-02, which was focused on providing broad relief.
“But crucially, I think it's important to remember that that approach also at its core contained some of the same requirements that were in the Obama administration approach. An obligation to uphold a best interest standard, a fiduciary standard. And the advice that you're giving, and policies and procedures are the two big pillars of what were in the Obama administration approach.”
What’s more, the SEC took action to update its standards and the NAIC has also issued a model rule, which has been adopted by a number of states.
“The landscape, as I see it right now, is that, thanks to the efforts of the prior administration, and the SEC, I think the biggest parts of the problem have been addressed. But I'm not foreclosing any action by the Department of Labor in that space. I will note, for example, that the SEC doesn't really cover advice to plans, as opposed to advice to plan participants. So, there are issues that we will want to look at in any action here.”
One such issue that hasn’t been addressed by the DOL or SEC is that of advice in the insurance market, Khawar further noted. In that context, the SEC rules don't really apply, as most insurance products aren't governed by the SEC's jurisdiction, while the NAIC’s model rule is not universal nationwide, he explained. “A big part of the concern that we have right now is that, if you think about it from a participant standpoint, we have this weird patchwork of regulation,” the Deputy Assistant Secretary observed.
“And so, a lot of what we are thinking about is how can we make sure that every retirement investor, no matter what part of the U.S. they're in, no matter who they're talking to, can know that when they're talking to someone and getting retirement investment advice, that advice is going to be in their best interest,” he further emphasized.
Cybersecurity
Finally, in turning to cybersecurity, Graff asked Khawar to comment on the issue from an enforcement standpoint and what he would suggest to fiduciary advisors who worked closely with many plan sponsors.
Khawar explained that he views this as an “existential issue,” such that employers can choose whether to offer a plan, but participants can also choose whether or not to participate. “And I think the big concern we have is that people who've told me they don't participate in a 401(k) comes down to a lack of trust in the system.”
“The concern I have is what happens if there are two or three or four really big breaches. What does that do to shake consumer confidence in the system that we've worked so hard to maintain and grow?” he explained.
In terms of steps to take, Khawar noted that the informal guidance the DOL issued addresses steps that both participants and plan sponsors can take. The guidance to plan sponsors is to help them understand what kinds of questions they should ask when hiring a service provider. “There's a level of sophistication that we expect that's beyond a participant, but not at the level of the cybersecurity people that we have in my agency.”
