1/21/2016. Department of Labor Update Presented By Dale R. Vlasek. January 21, 2016

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1 1 Department of Labor Update Presented By Dale R. Vlasek January 21, I. Department of Labor (DOL) Proposed Regulation Defining Fiduciary Background ERISA defines fiduciary among other things as including a person who renders investment advice for a fee. ERISA Section 3(21)(A)(ii) ERISA Fiduciary Duties A fiduciary must exercise his or her duties with respect to the plan Solely in the interest of the participants and the beneficiaries; 3 For the exclusive purpose of providing benefits to such participants and beneficiaries in defraying the administrative costs; With the care, skill, prudence and diligence that the prudent man when acting in a like capacity and familiar with such matters would use; In accordance with the plan documents; and By maintaining additional ownership of plan assets within the jurisdiction of the courts. ERISA 404(a)(1), (b) 4 5 ERISA Fiduciary Duties Fiduciary self-dealing is a prohibited transaction under ERISA: As a result of this, a fiduciary may not do any of the following: Deal with the assets of the plan in his or her own interest; Engage in any transactions with parties who have interests that are adverse to the plan; or Receive any consideration from any party that is involved in a transaction with the plan assets. ERISA 406(b) New Proposed Fiduciary Rule Defines investment advice as including: Recommendations as to the advisability of Acquiring Holding Disposing or exchanging securities or other property 1

2 Holding Disposing or exchanging securities or other property Recommendations to take a distribution of benefits Recommendations as to the investment or management of securities or other property to be rolled over or otherwise distributed from a plan or IRA Appraisal or valuation of securities or property Recommendations of person who is also going to receive a fee or other compensation to do any of the things described above Fee or Compensation is defined as Any fee or compensation (direct or indirect) received for the investment advice from any source Or any fee or compensation incident to the transaction Includes brokerage fees, mutual funds and insurance sale commissions Exemptions Statements or recommendations made to a large plan investor with financial expertise by a counterparty acting in an arm s length transaction; Offers or recommendations to plan fiduciaries of ERISA plans to enter into a swap or security-based swap that is regulated under the Securities Exchange Act or the Commodity Exchange Act; Statements or recommendations provided to a plan fiduciary or an ERISA plan by an employee of the plan sponsor if the employee receives no fee beyond his or her normal compensation; Marketing or making available a platform of investment alternatives to be selected by a plan fiduciary for an ERISA participant-directed individual account plan; The identification of investment alternatives that meet objective criteria specified by a plan fiduciary of an ERISA plan or the provision of objective financial data to such fiduciary; The provision of an appraisal, fairness opinion or a statement of value to an ESOP regarding employer securities, to a collective investment vehicle holding plan assets, or to a plan for meeting reporting and disclosure requirements; and Information and materials that constitute investment education or retirement education. Best Interest Contract (BIC) Exemption To facilitate plan and IRA investment consulting, the DOL has proposed a Prohibited Transaction Exemption Proposed Prohibited Transaction Exemption would allow Advisors and their Financial Institutions to receive compensation from the purchase, sale or holding of an Asset by a plan or IRA Advisors are brokers, insurance agents or other individuals who are fiduciaries Financial institutions are Registered Investment Advisors, bankers, insurance companies, 2

3 Advisors are brokers, insurance agents or other individuals who are fiduciaries Financial institutions are Registered Investment Advisors, bankers, insurance companies, registered broker dealers Best Interest Contract (BIC) Exemption Assets are bank deposits, CDs, mutual funds, bank collective funds, insurance company separate accounts, exchange traded REITs, ETFs, corporate bonds, government debt securities, insurance and annuity contracts, GICs and exchange-traded securities Assets are NOT future call or put options, straddles or option contracts, non-publically traded securities or limited partnership interests Requirements of BIC Written contract between plan sponsor of less than 100 participants or IRA holder between advisor and financial institution Specifically includes the following: Acknowledgment of their fiduciary status Commitment to basic standards of impartial conduct, which generally incorporate an ERISA fiduciary standard of care for prudence and loyalty Warrants that the financial institution has adopted written policies and procedures designed to mitigate conflicts of interest and ensure adherence to standards of impartial conduct (which includes not authorizing compensation or incentive systems that would tend to encourage recommendations not in the best interest of the retirement investor) Requirements of BIC Disclosure of material conflicts of interest (e.g., whether offering proprietary products or receiving third party payments) and information about fees The contract may not include certain prohibited contract provisions, such as disclaimers or limitations of liability for violations of the contract, or a waiver of the retirement investor s right to participate in class action litigation (although agreement to binding arbitration with respect to individual contract claims would be permissible) Compensation Structure Financial institution must indicate it does not have a compensation program or structure that would encourage advisors not to act in best interest of plans or IRAs Disclosure BIC requires disclosure to the public and at point of sale Point of information Cost of acquisition Cost of maintaining Cost of selling Other costs Financial Institution Annual summary of costs Also information to DOL II. DOL Proposes Rules to Assist State-Sponsored Retirement Program Payroll deduction IRAs 3

4 II. DOL Proposes Rules to Assist State-Sponsored Retirement Program Payroll deduction IRAs DOL Safe Harbor Program to avoid ERISA coverage Under the proposed regulations a program created under state law and administered by the state which requires employers to offer a payroll deduction IRA program will not be subject to ERISA, provided, among other things: Participation by employees is voluntary Employers are responsible only for collecting employee contributions by payroll deduction and remitting them to the program The contributions are deposited into IRAs The normal IRA distribution restrictions and rules apply DOL Proposes Rules to Assist State-Sponsored Retirement Program The state is responsible for either investing the IRA deposits or selecting the investment options for the IRA The state is responsible for notifying employees of their rights under the program The state is responsible for enforcing employee s rights State-Sponsored Multiple Employer Plans (MEPs) The DOL has blessed the creation of state-sponsored multiple employer plans (MEPs). Under a state-sponsored MEP, various unrelated employers could adopt an ERISA-covered plan. The state or its designee would be responsible for running the plan as the plan administrator and would serve as the plan s fiduciary. The state or its designee would arrange for the administration of the plan, selecting the service providers, choosing investment options, providing services and paying benefits. There would only be a single Form 5500 filed regardless of the number of employees who chose to adopt the program. The overall effect of a state-sponsored MEP would be to take advantage of economies of scale to lower administrative and investment costs. III. DOL Plan Audit Issue DOL Plan audit activity has increased and DOL auditors are looking at the following: Fee disclosures Implementation in 2012 Purpose was to provide plan sponsors and plan participants with hard data about fees The next step is for the plan fiduciaries to act on that information DOL has begin asking to see the information when they audit plans Affordable Care Act Compliance Review of SPDs Review of notices provided to participants Insurance or self-insurance compliance with market reforms IV. DOL Urges Form 5500s for plans with 100 or more participants require an audit 4

5 Form 5500s for plans with 100 or more participants require an audit DOL found 40% of audits had problems DOL has initiatives to improve audits by improving auditors DOL has sent a letter to many plan sponsors highlighting the need for qualified CPAs to perform the audit The DOL instructed plan sponsors to consider the following: The number of plan audits the CPA firm conducts each year (including the type of plan audits) The extent of specific annual training the CPA firm received in auditing plans The status of the CPA s license with the state accounting board 20 DOL Urges Whether the CPA firm has been the subject of any prior DOL findings or referrals, or has been referred to a state accounting board or the American Institute of CPAs for investigation; or Whether the CPA firm s plan audit work has recently been subject to a peer review by another CPA firm and whether such review had negative findings 5