Drinker Biddle partner (and former EBSA Assistant Secretary) Brad Campbell covered a wide range of issues that might affect plan advisors at the CUNA Mutual/CPI Retirement Academy in St. Louis on April 9. Along with Obama’s budget proposal to “tax the rich” and the looming debate over the definition of fiduciary, Campbell addressed model portfolios, TDFs, 408(b)(2), lifetime income and abandoned plans.
President's Budget Proposal
President Obama’s proposed $3 million cap on 401(k)s and IRAs was based on the amount needed to generate $205,000 of annual income. Campbell questioned whether the cap would be on the hard dollar amount or the annuity, and whether the provision would apply to DB plans.
On the tax reform front, Campbell noted that Senate Finance Committee chairman Max Baucus (D-MT) will probably have a tax reform measure ready by August.
Definition of Fiduciary
Campbell raised concerns about the possible prohibited transactions that might result from an expanded definition of fiduciary. The DOL’s expanded definition would force advisors to decide if they can (or want to) serve as fiduciaries, which would dictate their business model and compensation structure. Rather than the current five-part test, an advisor would be a fiduciary under the expanded definition if it renders individualized advice and that advice is considered by the investor when they make investment decisions.
Campbell also raised the question of whether the DOL has jurisdiction over IRAs — and whether it should. The DOL claims that authority under its power over prohibited transactions, even though they’re not subject to ERISA, where the DOL usually plays. Either way, the DOL is moving ahead, trying to make all advisors that work on rollovers fiduciaries, Campbell noted. This might force out commissioned advisors who will not easily be able to receive level compensation.
The thorny issue not raised is whether DC and IRA providers (like bundled record keepers) and online brokerage firms that solicit rollovers — and sometimes provide misleading information about fees and advice about the merits of a participant moving money out of a plan — are having a potentially fiduciary conversation when they do so.
Due to the upcoming — and perhaps contentious and lengthy — nomination hearings for Justice Dept. attorney Thomas Perez, President Obama's nominee to be Secretary of Labor, Campbell believes that the original July deadline for the DOL to submit the proposed fiduciary regulation to the White House could slip to September.
Model Portfolios
If an advisor’s model portfolio uses all designated investment alternatives (DIAs), then it is not a DIA itself, but the advisor must describe how it functions and differs from other DIAs. But if that same portfolio is unitized or uses investments that are not plan DIAs, then it must follow the disclosure rules of a DIA. Campbell wondered whether these models set up a potential fiduciary conflict if the advisor itself is a fiduciary and offers its own DIA to plan participants.
408(b)(2) Disclosure
Like a bad penny that keeps turning up, 408(b)(2) summary disclosure rules are expected this year, though Campbell was not certain about when. If a simple two-page overview referring back to the original disclosure is required, then little will have to be done, but if detailed charts are required, the industry might incur significant expense, he noted.
Target Date Funds
Citing a recent DOL report on TDFs, Campbell highlighted their focus on plan demographics, including the availability of DB plans. He also addressed the different areas of jurisdiction for the SEC, which covers mutual funds and tends to be more detailed in its disclosure requirement, and the DOL, which covers all investment types and tends to be less detailed and interventionist. Either way, more TDF disclosure rules are likely, given their growing popularity and way in which they differ from traditional 401(k) investments, he said.
Lifetime Income
In the near future, new participant statements will include an estimate of the future income that a participant’s plan would generate in retirement, Campbell noted. But he wondered whether the income stream would be based on a participant’s current account balance or projected balance at retirement based on various factors like age, deferral rates and salary. Limiting the projection to the current balance might disillusion participants and make them wonder if they should continue to contribute or, even worse, cash out.
Clearly, these are active times for plan advisors, who sometimes grouse that the government is screwing up their business — forgetting that in a very real sense the government actually owns the business, as evidenced by the multitude of requirements under the tax code and ERISA that Campbell touched upon. The challenge: finding ways to turn these potential threats into opportunities.
