Another Piece of the Extended Puzzle - Proposed DOL Regulations Reach to General Prudence Rules

Issues relating to fees to service providers have become high-profile issues, with a proliferation of indirect-fee class actions and the inevitable follow-on press reports. These issues have given rise to a four-piece puzzle, with activity regarding (i) regulations under ERISA Section 408(b)(2), (ii) the rules governing Form 5500, Schedule C, (iii) the "404(c)" rules for covered plans with participant-directed investments, and (iv) a number of legislative proposals in Congress.

The issue is clearly front-burner for the DOL, which is trying to proceed with a coordinated new regime that would have a real impact on the quantity and quality of information available to participants. There has already been movement in the first two arenas, with proposed 408(b)(2) regulations and new rules for Form 5500, Schedule C, both of which have been controversial. Congress has proceeded, too, with the proposed Miller bill. The only theater that had remained dark was the one relating to the 404(c) rules.

Section 404(c) is the section that gives plan fiduciaries the opportunity to limit their liability in the case of plans which provide for participant-directed investments and which satisfy the regulatory Section 404(c) requirements. Thus, the DOL had broad discretion to impose such informational requirements as it saw fit under Section 404(c). Showing how much attention it is giving to the question of participant information, though, the DOL took this opportunity to expand the expected scope of its rulemaking and issue rules proposed to apply under ERISA's general prudence rules, whether or not the protection of Section 404(c) is sought. The general prudence rules, like the 404(c) rules, give the DOL a fairly free regulatory hand, as there is no clear limitation on the abilty to add regulatory color on what it means to be proceeding in accordance with general prudence-type considerations.  Thus, the new proposals would generally apply to all plans under which participants have the right to direct investments, even if the plan sponsor is willing to forego Section 404(c) relief. It is clear that that the DOL is making a concerted effort to establish a set of rules that will significantly change the nature of the information that is broadly available to participants in plans where they direct their own investments.

It remains to be seen whether the market will view the balance that has so far been struck by the DOL as being the right one. I expect the comment process regarding this particular piece of the puzzle to be extremely active in terms of submissions on all sides of the market, including participant-advocacy groups, employers, financial services organizations and administrators. One thing seems certain - the old rules, with a much more generic approach to the provision of information, seem eventually to be a thing of the past.

Comments

[Mike Alfred]

Now that 408(b)(2) has been temporarily stalled, we will probably see a much stronger push for HR3185 sometime in the first half of the year. I suspect there will be more news on this shortly. Ultimately, I don't think we can rely solely on the political process to provide increased transparency in the 401k marketplace. New tools are being developed by private companies that should accelerate this process. As you state in your blogpost, the old rules will seem be a thing of the past.

[Ron Dean]

I tend to agree that most (nearly all) participants will be "Deer in the Headlights" when given this information. However, if we back up a few steps, they're already "Deer in the Headlights" when given the various investment options and someone tries to "educate" them about investment theory. So the new information moves us from 91% baffled to 94% baffled. Big deal.

The more important movement is for the employers and plans. Isn't it time THEY started being more educated about which options to offer? Ok, so fund X returned 6% last year - net of another 3% in fees running all the way up the ladder. Maybe fund Y only returned 5% net of 1% in fees running all the way up the ladder. A prudent investor would want to know these facts and would not be satisfied comparing only 6% with 5%. And don't we want to encourage investors to be prudent?

[Harral Scott, CPA, CFP]

The proposed fee disclosure rules will not help participants. They are not shopping for a plan they have to choose to participate in or not. I conduct many meetings for plan enrollments and this disclosure will be one more stumbling block to the worker deciding to save for their future or not. The DOL should focus on encouraging employees to participate and employers to establish plans.